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LAW, ECONOMICS, AND CONFLICT
LAW, ECONOMICS, AND CONFLICT Edited by Kaushik Basu and Robert C. Hockett
CORNELL GLOBAL PERSPECTIVES
CORNELL UNIVERSITY PRESS ITHACA AND LONDON
Copyright © 2021 by Cornell University Chapter 4: This is a forthcoming chapter in Law and Economy in a Young Democracy: India 1947 and Beyond by Tirthankar Roy and Anand V. Swamy. © The University of Chicago. Reproduced by permission. All rights reserved. Chapter 7: Sections of this chapter originally appeared in Law and Macroeconomics: Legal Remedies to Recessions by Yair Listokin. Reproduced with permission of Harvard University Press, by the President and Fellows of Harvard College. Copyright © 2019. All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 14850. Visit our website at cornellpress.cornell.edu. First published 2021 by Cornell University Press Library of Congress Cataloging-in-Publication Data Names: Basu, Kaushik, 1980–editor. | Hockett, Robert, editor. Title: Law, economics, and conflict / edited by Kaushik Basu and Robert C. Hockett. Description: Ithaca [New York]: Cornell University Press, 2021. | Series: Cornell global perspectives | Includes bibliographical references and index. Identifiers: LCCN 2020058391 (print) | LCCN 2020058392 (ebook) | ISBN 9781501759383 (hardcover) | ISBN 9781501754821 (paperback) | ISBN 9781501759284 (pdf) | ISBN 9781501754838 (epub) Subjects: LCSH: Law and economics. | Law and globalization. | Sociological jurisprudence. | Globalization—Economic aspects. | Social conflict—Economic aspects. Classification: LCC K487.E3 L3887 2021 (print) | LCC K487.E3 (ebook) | DDC 340/.11—dc23 LC record available at https://lccn.loc.gov/2020058391 LC ebook record available at https://lccn.loc.gov/2020058392
Contents
Law, Economics, and Conflict: An Introduction Kaushik Basu and Robert C. Hockett 1.
The Interim Balance Sheet of Democracy: A Machiavellian Memo Célestin Monga
2.
169
Exchange Configurations and the Legal Framework Peter A. Cornelisse and Erik Thorbecke
10.
157
Why Economics Is a Moral Science: Lifting the Veil of Ignorance in the Right Direction Gaël Giraud
9.
140
Law and International Monetary Policy Regimes Yair Listokin
8.
127
New Technology, Increasing Returns, and the End of the Antitrust Century Kaushik Basu
7.
101
Forgotten Markets: The Importance of Pawnshops Marieke Bos, Susan Payne Carter, and Paige Marta Skiba
6.
86
Overreliance on Law: Rural Credit in India, 1875–2010 Anand V. Swamy
5.
55
Fighting Corruption in China: The Roles of Formal and Informal Institutions Cheryl Long
4.
11
The Third Function of Law: Its Power to Change Cultural Categories Karla Hoff and James Walsh
3.
1
182
Reimagining Governance through the Role of Law: A Perspective from the World Development Report 2017 Luis F. López-Calva and Kimberly B. Bolch
195
vi Contents
11.
Beyond Law and Economics: Legitimate Distribution without Legislation? Nicole Hassoun
About the Contributors Index
202 211 215
LAW, ECONOMICS, AND CONFLICT
L AW, ECONOMICS, AND CONFLICT An Introduction Kaushik Basu and Robert C. Hockett
We live in the best of times, we live in the worst of times. As we are often reminded by economists and other social scientists, the per capita income in the world today is higher than ever before, and human beings have a longer life expectancy at birth than they have ever had before. We are able to launch rockets into space, observe and track the planets around us, monitor the arctic ice caps, and predict the weather more accurately than we have ever done before. All this is true. But it is also true that we are in one of our most divisive times, with politics polarized as rarely seen outside of a major war and with regions in open conflict, inhabited by p eople whose lives and life prospects are ruined. There are mass movements of people fleeing from their home countries and continents in search of safety and livelihoods, and, equally, there are efforts to stop them at the gates of where they arrive. Climate change hangs over our heads like the sword of Damocles. Sixty-six million years ago, it must have seemed wonderful for the dinosaurs that had lived for millions of years, grown in size, and ruled the earth. L ittle did they know that these were also the worst of times for them, that they would see a collapse like never before and be pushed into oblivion. Unlike the dinosaurs, which did not know that the best of times could also be the worst of times, we h uman beings in the twenty-first c entury can fathom this, analyze our own predicament, and try to avert crisis and conflict. There is no doubt that we have done well thus far without much self-analysis. Individuals went about maximizing their own interests and acquisitions, and the invisible hand of the market worked—at least reasonably well—so that societies prospered and our economies grew. From as early as the late eighteenth century, with the publication 1
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of Adam Smith’s seminal book (Smith 1776), we tried to understand this mysterious invisible hand, and we debated whether this could always be relied on to deliver or w hether we needed to marry it with the hand of the state, with its laws and regulations. Just as markets had flourished for thousands of years, we also discovered the importance and the power of the law starting at least five or six thousand years ago. From the Code of Hammurabi through the alleged edicts of Lycurgus in Sparta and the well-articulated laws of Solon in Athens, we have come a long way (Hockett 2009). The recognition of the importance of the interface between economics and law happened much later. It was recognized in the debates preceding and following the enactment of the Sherman Act in the United States in 1890. It emerged as a formal discipline in the 1960s, with a series of important papers by Coase (1960), Calabresi (1961), Becker (1968), and others. The rise in global conflict, the dramatic technological breakthroughs of our digital age, and the floundering of traditional law and economics has led to some soul-searching about the fundamentals of law and economics (Posner 2000; McAdams 2015; Basu 2018). It was with t hese concerns in mind that we set up in 2017 a new research unit at Cornell called CRADLE—Cornell Research Academy of Law, Development, and Economics, the acronym creating a challenge we had to live up to. We decided early on that CRADLE initially should focus on the conflicts around the world mentioned in the opening paragraph. With that in mind, a conference was organized in New York City in April 2018. This book is a selection of papers presented at the conference and some written subsequently that are based on the papers presented and discussions that took place at the conference. Our focus is on law and economics but more specifically the new challenges arising from globalization, technological advancement, and their concomitant— social and political conflict. In the chapters that follow, we have some of our best minds mulling over the challenges of this new world and how we can steer a course to give individuals the space and freedom to work, innovate, earn, profit, and prosper and the state the wisdom to regulate and ensure that conflicts do not occur, externalities are managed, and some are not marginalized and impoverished while others accumulate and prosper. The opening chapter, “The Interim Balance Sheet of Democracy: A Machiavellian Memo,” by Célestin Monga, goes to the heart of the concern that led to the conceptualization of the conference. The chapter talks to us about the “global economy of anger” and the “great discordance” that has been the collateral offshoot of technological progress and globalization. Drawing on some of his own earlier work (Monga 1996), the author shows that what is often overlooked is that these “advances” have been slowly eroding the foundations of global democracy, enabling political leaders in big and powerful countries to take actions that have
An Introduction
3
no legitimacy or legal basis and are sanctioned by none other than themselves, which is anathema to the very idea of democracy. He talks about the “Tuesday morning meetings” in the White House, where “whoever is the US president” has “the sole power to decide who, among the 7 billion people on earth, must die if suspected of terrorism . . . by a group of nonelected public officers.” This chapter raises deep questions about our capacity to uphold fairness, equity, and voice, given these extralegal and subterranean channels of power, enforcement, and punishment. Given the long history of democracy, which goes back to Athens and its surrounding territories of sixth century BCE, we often act as though we have an adequate understanding of its structure and modalities. Chapter 1 argues that this is far from the truth. Given the intertwining of democracy with technology and institutions that are continuously evolving, our understanding is quite minimal, and the weaknesses are showing up in a stark fashion in today’s globalized world. This chapter lays out the importance of independent research and suggests a research agenda for law and economics, which is interesting to read in its own right and sets the tone for much of what follows in this book. Hope lies in the fact that economics has in recent years (too slowly though, some would say) broadened its approach, dismantling some of the walls around it and opening itself to ideas, concepts, and theories from politics, sociology, biology, and psychology. The second chapter of this book, “The Third Function of Law: Its Power to Change Cultural Categories,” by Karla Hoff and James Walsh, is an introduction to how “law and economics” is affected by this broadening of the scope of economics. As such, chapter 2 could provide some of the conceptual foundation stones needed to address the kinds of real-world problems raised in chapter 1. Standard law and economics, as inherited from the writings of the 1960s referred to above, was rooted in the neoclassical assumption of ruthlessly rational individuals, responding to the law based on what it commands, its punishments and rewards. This “command function” of law was partly dismantled and enriched by the new work on the “expressive function,” which recognized that the law works not just by command, reward, and punishment but also by triggering social norms and affecting some of our preferences (Sunstein 1996). In their chapter, Hoff and Walsh introduce a third novelty, what they refer to as the “schematizing function” of the law (see also Hoff and Stiglitz 2016). Lodged in their brains, h uman beings have cultural categories and concepts that influence what they focus on and what they ignore. At one level, all this happens instinctively and so may seem like innate qualities, but they are influenced and shaped by many social factors (and importantly, in the context of this chapter and this book) by the laws of the nation and also the deliberations surrounding the adoption of laws. The chapter shows how entrenched cultural categories can
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be used to both reinforce and to block a law. In particular, a law that prohibits discrimination against certain groups can be partly undone by harnessing such cultural forces. The chapter builds on behavioral economics but is also an original contribution in terms of the new concepts and ideas it brings to the field and thus provides the foundations for some of the more everyday policy concerns that later chapters bring to the table. One enduring theme is corruption. Interest in and writings on corruption go back to ancient times (most notably to Kautilya’s Arthashastra), and it has triggered a lot of the modern thinking on law, regulation, and economic functioning. Effective corruption control beckons us to take a broader view of economics and look at social norms and psychology, as discussed in chapter 2. It is therefore interesting to read chapter 3, “Fighting Corruption in China: The Roles of Formal and Informal Institutions” by Cheryl Long, as almost a case study of this broader approach to law and economics in contemporary China. As Long notes, corruption is generally made possible by the use of informal ties and links among individuals, since it requires chains of actions for which it is not possible to harness the law, and so one has to rely on trust and also informal channels of punishment and reward. This could explain why nations, such as China and India, in which familial ties and social connections and hierarchies are emphasized, are ones with greater corruption. It is from this premise that chapter 3 takes off. It is indeed an interesting time to study China. Under Xi Jinping there has been a bigger effort to control corruption than witnessed in a very long time in China. More government officials were arrested on charges of corruption during the four years preceding 2018 than in the four decades before that. But the number of arrests in itself cannot automatically be treated as an indicator of success. In all countries with a corruption control campaign, one has to be mindful of risks. In countries with complex laws and regulations, where virtually everybody, knowingly or unwittingly, infringes some laws, corruption control can easily become an instrument for silencing dissent and opposition. When you have a f ree pick of whom you arrest for corruption, the temptation is to arrest those who oppose you. There is the further problem of corruption control damaging legitimate business and trade, because people become overly cautious and desist from making decisions. This can drive some of the corrupt activities deeper underground and create the illusion of greater success than is warranted. It can also slow down growth. Long’s chapter gives us a bird’s-eye view of the full range of connected themes. Though her study is focused on China, it has lessons for all nations trying to curb corruption and illegal business transactions. Let us move from China to India. A long-standing topic in law and economics, which triggered as much theorizing as did the enquiry into market competi-
An Introduction
5
tion and antitrust law, is that of the functioning of credit markets. There is of course the extensive topic of debt and credit in macroeconomics and monetary policy. But when it comes to law and economics, the management of the rural credit market has been a source of abiding interest to economists and policymakers in emerging market economies. It is arguable that India has been the place of some of the most original research in this field. The fourth chapter of this book, “Overreliance on Law: Rural Credit in India, 1875–2010” is by Anand Swamy, who has done some highly regarded historical research on credit markets in India (see Kranton and Swamy 1999). This chapter is a comprehensive study of rural credit in India, spanning over a c entury. The focus of the chapter is on why the law has fared so poorly in regulating the rural credit market and enhancing farmer welfare, which is the ostensible aim of the law. Despite being rooted in history, chapter 4 has important bearings on con temporary India. It discusses in some detail the regulation of rural credit and the rise of the microfinance industry since the celebrated economic reforms of 1991 in India. Commenting on the current situation, Swamy notes that the levels of farmer stress is at an all-time high in India, with many farmers driven to levels of debt that they clearly cannot pay back in their lifetimes, and that there has been a large increase in the incidence of farmer suicides. The chapter brings evidence and analysis to show that the numerous credit laws and regulations have failed to do much to alleviate the problems because of our failure to recognize that credit markets are interlinked with other features of the rural economy. The chapter makes a pointed recommendation—the need to strengthen agricultural insurance and the state’s willingness to absorb some of the shocks stemming from productivity fluctuations. From discussions of China and India, we turn to the developed world and in particular, the United States. A large literature exists on informal credit markets in the developing world, but the topic has attracted less attention in wealthy countries. But for low-income families, even in rich countries like the United States and Sweden, pawnshops and the institutions of pawnbroking can play a crucial role. We are therefore glad to include chapter 5, “Forgotten Markets: The Importance of Pawnshops,” by Marieke Bos, Susan Carter, and Paige Skiba, which nicely complements chapter 4’s coverage of informal credit in rural India. Studies show that large numbers of poor people and especially those who are unbanked use pawn loans by leaving collateral. This institution has existed for centuries and while attention has shifted away from it—thanks to the rise of the big corporation and the super-rich, who lend and borrow huge sums of money—the informal pawn broker remains a source of survival for the very poor. And this is not unconnected to what happens in the larger, formal economy. As Bos, Carter, and Skiba point out, after the global financial crisis that began in the United States in 2007–2008,
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quickly engulfed the world, and became the protracted Great Recession, the pawnbroking industry in the United States and Sweden grew by an astonishing 20 percent per year, as poor people were forced to turn to informal credit for their survival. Despite this industry’s importance, pawnbroking has characteristically received little attention and also little regulation. This is a chapter that raises a host of questions regarding the welfare consequences of t hese informal lending markets in rich countries and how they could be regulated. This is a chapter that has the potential to spur new research. One specific area in which the technological advances of recent decades referred to in chapter 1 is having a deep impact is the effectiveness of antitrust laws. There has been a lot of soul-searching in recent times on how large tech companies and digital platforms have been able to use technology and global dispersion of their activities to circumvent antitrust laws, most notably in the United States. That country had played a pioneering role in promoting competition and curbing collusive pricing, beginning with the enactment of the Sherman Act in 1890 (see Khan 2016). Chapter 6, “New Technology, Increasing Returns, and the End of the Antitrust Century” by Kaushik Basu, shows that the challenge is not merely a matter of determination and the willingness to use the laws. It argues that the changing modalities of production, inspired by the digital revolution, are fundamentally altering our capacity to use antitrust laws and nurture competition without severely damaging productivity. The chapter develops the idea of “vertically serrated” markets. These are markets where, for example, the hundred firms involved in the automobile industries are not organized like they w ere in the olden days, when each one of them produced complete cars. Instead, the hundred firms now are typically specialized: one for producing the braking system in its entirety, one for the chassis, one for the wheels, and so on. In the polar case, each one of them produces all of one part of the car. Chapter 6 characterizes the equilibrium of these vertically serrated industries. It shows how there will be a tendency for all surplus to collect in few hands and for a possible exacerbation of price discrimination. It is then shown how, thanks to increasing returns to scale, it is difficult to use antitrust laws to curb these inequities. The chapter closes with a discussion of how we may have to use other kinds of laws, including those pertaining to dispersed shareholdings and profit sharing to take on this new challenge of our times. Rich countries and advanced economies, poor countries and emerging-market economies are all subjects that deserve individual scrutiny and analysis, as the next three chapters show, but in a globalized world what one nation does can have profound effects on other economies. This recognition brings us back to the topic discussed in the opening chapter, that of global interactions and the scope for regulating them. The focus of chapter 7, “Law and International Monetary Regimes”
An Introduction
7
by Yair Listokin, is on one aspect of the large political economy of multi-country policy interventions, that which works through the money markets, liquidity, price controls, and overall macroeconomic policy. This is an important area of research and policy activism involving important multilateral organizations, like the International Monetary Fund and the Bank of International Settlements. There have been debates about exchange-rate policies (which by definition, have effects on other countries), about capital controls (which may block money from entering your nation but also blocks the movement of money from other countries), and price controls (which is often treated as a no-go area). Capital controls and interventions in the price system have also been politically divisive topics. The creation of the European Union helped stimulate these debates, since there were immediate policy spillovers that directly affected human well-being, from Britain and Germany to Greece and Ireland. This chapter discusses these topics and puts forward some radical proposals with special commentary on the European Union. Chapter 8, by Gael Giraud, takes us back to some of the moral and philosophical questions that underlie a lot of law and economics and were touched on in the opening three chapters: What role do our moral preferences play in our choices? And what is the relation between economics and moral science? These are important matters that underlay a lot of the founding ideas of economics. It is worth remembering that, starting in 1752, Adam Smith held the Chair in Moral Philosophy at the University of Glasgow and would soon be working on The Theory of Moral Sentiments, which would be published in 1759. At first sight, t here seems to be a sharp contrast between the way h uman beings make moral choices and the way in which homo oeconomicus makes individual choices. The former is meant to be made from behind the veil of ignorance or with the objectivity of Smith’s impartial spectator and is subject to contestation, whereas the latter is a person’s personal preference and not a matter of contestation. But there are connections between ethical preferences behind the veil of ignorance and personal preferences. This chapter takes a relatively unusual line by showing how our ethical preferences can affect our personal preferences and choices. By this intertwining of ethical and personal choices, Giraud takes us back to some of the earliest concerns of economics and tries to rehabilitate economics as a moral science. The last three chapters of this book are commentaries that w ere written by participants at the conference, using the hindsight of ideas and data presented by the speakers. Much of the early interest in the interface between law and economics arose from the realization that, while markets are a powerful instrument for delivering goods and serv ices (and ultimately, well-being) to our doorstep, we also need to
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contend with market failures. Rural credit markets (as discussed in chapter 4) are rife with market failures because of asymmetric information. Corruption of the kind discussed in chapter 3 flourishes in many countries because of the failure of markets to deliver. Antitrust laws are needed, because monopolies and oligopolies often cause markets to be inefficient and consumers and workers to suffer. Chapter 9, “Exchange Configurations and the L egal Framework,” by Peter Cornelisse and Erik Thorbecke, develops the idea of “exchange configuration” to look at some of t hese diverse m atters through a unifying lens. Briefly summarizing important prior developments, such as New Institutional Economics and Transactions Cost Economics, Cornelisse and Thorbecke discuss the role of law and regulation for tackling not just market failures (such as the inadequate provision of public goods and our inadequate h andling of the environment) but also equity and income distribution. Chapter 10, “Reimagining Governance through the Role of Law: A Perspective from World Development Report 2017” by Luis-Felipe Lopez-Calva and Kimberly Bolch, draws on the ideas and concepts presented in the first seven chapters. It evaluates them based on the framework in the report on law and governance that was the focus of the 2017 World Development Report of the World Bank. That report had attracted a huge amount of attention from both policymakers and the academic community (see World Bank 2017). Lopez-Calva and Bolch argue that although we use the word “law” in a rather generic fashion, in reality, there are various types of laws, and it is important to classify them. By using illustrations from the chapters in this book, Lopez-Calva and Bolch show that laws often have a hierarchy. They can be ground-level rules pertaining to how individuals relate to one another, and at the other extreme, they can be rules about how rules are to be created and enforced. This chapter also draws special attention to understanding the role of law as an instrument for resolving disputes and contestation. During major shifts in technology, such as the one the world is witnessing now, this becomes key to the peaceful resolution of conflict, as discussed in several chapters, and, in the context of the global theater, is especially emphasized in chapter 1. Chapter 11, “Beyond Law and Economics: Legitimate Distribution without Legislation?” by Nicole Hassoun, brings the curtain down on the project by evaluating and commenting on various special themes and policy problems discussed in this book using the broader brush of moral philosophy. She argues that law and economics, while themselves multidisciplinary, have a basis in an even broader disciplinary mooring, that of philosophy. Drawing on classic works in law, economics, and philosophy, such as Dworkin (1986) and Raz (1986), and on some of her own research (Hassoun 2008), she raises important questions about the concept of legitimacy in the context of the kinds of interventions discussed else-
An Introduction
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where in this book, such as central bank policies (chapter 7) and antitrust regulations (chapter 6). While much of standard law and economics deals with the direct economic consequences of l egal interventions, we often overlook the fact that many of t hese decisions taken by lawyers, policy economists, and technocrats can have sweeping consequences. A central bank’s act of lowering interest rates can enrich thousands of people and also cause prices to rise and put the livelihood of thousands of people in peril. What gives technocrats the legitimacy to take these actions? What makes t hese kinds of sweeping decisions, with large h uman consequences, “morally permissible”? T hese are the questions that Hassoun raises in this compelling closing chapter. Some of these big topics do not have easy answers and are, by their nature, open ended. But she also posits some minimal necessary conditions that must be fulfilled for these big legal and other policy decisions with large allocative consequences to be considered morally legitimate. This and the many open-ended questions raised in this chapter are of value both in giving deeper roots to the ideas discussed in the present book and in doing the spadework for further research and sequels to it.
References Basu, K. 2018. The Republic of Beliefs: A New Approach to Law and Economics. Princeton, NJ: Princeton University Press. Becker, G. 1968. “Crime and Punishment: An Economic Approach.” Journal of Political Economy 76: 169–217. Calabresi, G. 1961. “Some Thoughts on Risk Distribution and the Law of Torts.” Yale Law Journal 70: 499–553. Coase, R. 1960. “The Problem of Social Costs.” Journal of Law and Economics 3: 1–44. Dworkin, R. 1986. Law’s Empire. Cambridge, MA: Harvard University Press. Hassoun, N. 2008. “The Evolution of Wealth: Democracy or Revolution?” in J. Knight (ed.), Wealth, NOMOS, LVIII. American Society for Political and Legal Philosophy. Hockett, R. 2009. Law. Chicago: Chicago Review Press. Hoff, K., and J. Stiglitz. 2016. “Striving for Balance in Economics: T owards a Theory of the Social Determination of Behavior.” Journal of Economic Behavior and Organization 126: 25–57. Khan, L. 2016. “Amazon’s Antitrust Paradox.” Yale Law Journal 126: 710–805. Kranton, R., and A. Swamy. 1999. “The Hazards of Piecemeal Reform: British Civil Courts and the Credit Market in Colonial India.” Journal of Development Economics 28: 1–24. Kautilya. ca. 300 BCE. Arthashastra. Penguin edition. McAdams, R. 2015. The Expressive Powers of Law: Theories and Limits. Cambridge, MA: Harvard University Press. Monga, C. 1996. The Anthropology of Anger: Civil Society and Democracy in Africa. Boulder, CO: Lynne Rienner Publishers. Posner, E. 2000. Law and Social Norms. Cambridge, MA: Harvard University Press. Raz, J. 1986. The Morality of Freedom. Oxford: Oxford University Press.
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Smith, A. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. 1976 edition. Oxford: Clarendon Press. Sunstein, C. 1996. “On the Expressive Function of Law.” University of Pennsylvania Law Review 144: 2021–2053. World Bank. 2017. World Development Report, 2017: Governance and the Law. Washington, DC: World Bank.
1 THE INTERIM BALANCE SHEET OF DEMOCRACY A Machiavellian Memo Célestin Monga
very Tuesday morning, the heads of intelligence agencies and the national secuE rity advisor of the United States gather around the US president in the Situation Room at the White House in Washington, DC. They discuss the most confidential document in American politics: the list of people in various places in the world who are considered dangerous “threats” or “terrorists,” cannot or should not be captured, and are recommended for secret assassination. Sometimes the list includes the names, pictures, and profiles of American citizens and even minors whom national security experts in the executive branch of the US government believe should simply be killed—not arrested and brought to trial in the United States or elsewhere. The evidence against these suspects is classified and therefore not to be shown in court. Sipping coffee or tea, drinking orange juice, and perhaps sharing cookies, participants at these meetings discuss counterterrorism strategies and plans, and casually advise the US president on which suspects should be killed according to a priority list, even when the suspects are far from any battlefield. The confidential list of suspects is officially called the “Disposition Matrix”—a name that even George Orwell could not have i magined in his famous novel 1984. Decisions are made quickly, after the president has listened for a few minutes to the opinions of his small staff around the table. These Tuesday morning meetings w ere initiated and formalized during the administration of Nobel Peace Prize winner Barack Obama. Its members institutionalized the practice known as “targeted killings” and adopted new rules and regulations that grant whoever is the US president the sole power to decide who, 11
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among the nearly 8 billion people on earth, must die if suspected of terrorism. This group of nonelected public officers has been entrusted to make such uncontested and irrevocable decisions.1 Regardless of the country in which one lives, all citizens of the world are required to trust the sovereign, ultimate judgment and wisdom of the US president. The president takes the oath to protect the United States against terrorism and is entitled to unilaterally kill anyone anywhere in pursuit of this sacred mission.2 As noted by Greenwald, “The president’s underlings compile their proposed lists of who should be executed, and the president—at a charming weekly event dubbed by White House aides as ‘Terror Tuesday’—then chooses from ‘baseball cards’ and decrees in total secrecy who should die. The power of accuser, prosecutor, judge, jury, and executioner are all consolidated in this one man, and those powers are exercised in the dark” (Greenwald 2013). Since this information was made public, the world has learned that it was only the tip of an iceberg: The world has witnessed the deaths of countless civilians, often w omen and children, killed by drone strikes in Yemen, Pakistan, Somalia, Afghanistan, and elsewhere, who are simply referred to as “collateral damage.” Under a global-war theory, the entire planet is a battlefield. Targeted assassinations routinely take place in countries far from any war zone.
The fact that President Barack Obama, a Harvard-trained lawyer and a former constitutional law teacher at the University of Chicago, felt empowered and entitled by American laws and regulations to make these life-and-death decisions in secrecy, and to select who should be executed without any charges in the court of law or due process, sheds light on the status of habeas corpus, liberty, and the implementation of the Bill of Rights in the country still widely viewed as the most “democratic” in the world.3 Perhaps not surprisingly, it has also been revealed that many secretive practices considered illegal, undemocratic, and unethical by human rights organizations had been g oing on in democratic countries. For instance, it was revealed that the US National Security Agency had wiretapped top German officials and many world leaders (including from democratic countries) for long-term surveillance during several decades and had eavesdropped on several French finance ministers and collected information on French export contracts, trade, and budget talks (Guardian 2015). These revelations emboldened authoritarian political leaders around the world to assert and defend their own brand of democracy—many of them using the real or imaginary threats of global terror to justify the adoption of liberticidal measures. After all, if US presidents could unapologetically grant themselves the power to order the killing of anyone on earth without having to explain the reasons or provide evidence of guilt before any court of law, or secretly “dispose” of some p eople as
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they deemed appropriate—with indefinite imprisonment or death, why couldn’t other world leaders? If whoever holds power in the Oval Office can serenely wiretap the cell phones of several German chancellors or that of the president of Brazil, none of them suspected of being a potential “terrorist,” what would prevent the leaders of Russia, China, Indonesia, Venezuela, or Burundi from using similar tactics? If intelligence agencies in Western countries self-proclaimed as “democratic” could routinely conduct intelligence-gathering operations against foreign companies in the name of national security, why should other self-proclaimed demo cratic countries in Asia, Latin America, or Africa not do the same? These questions go well beyond legal debates over the extraordinarily broad powers of the “leader of the F ree World.” The issues underlying them also transcend the philosophical debates over the ethics of rules and practices by “demo cratic” governments expected to define themselves, in all circumstances, as nations where transparent and strong institutions are in place to ensure that the most sacred of all decisions (taking anyone’s life) are made within a system of checks, balances, and restraint. They are at the heart of the legitimacy and validity of democracy and freedom. Yet, despite some outrage (expressed mainly in intellectual circles), the dominant political reaction to these revelations and much of the literature on global political developments has generally been limited to analyses and commentaries on the mechanics of democracy. The focus has often been on problems with alternative, totalitarian systems of democracy (Lefort 1994), on problems with the process of democratic consolidation, on symptoms of its subversion by cynical political entrepreneurs (Levitsky and Ziblatt 2018), on “the rise of illiberal democracies” (Zakaria 2007, 2019), the functioning of political institutions, and so forth. Most recent studies of contemporary political events have not examined democracy itself, its relevance and feasibility a fter several centuries of implementation in an increasingly globalized world, where issues of economic governance have become more prevalent than almost anything e lse. A few authors have recently acknowledged the theoretical challenges of democracy and its zigzagging path in recent decades (Gauchet 2002). Some have questioned its founding myths, highlighted its contradictions, and suggested its reinvention (Canfora 2006). Others have highlighted its superficiality, its high emotional content, its obscenity and even naiveté (Debray 2007). Optimists have recommended that democracy be freed from suspicion of being a mainly Western concept and instead be viewed as a credible organizing tool for the polity, beyond universal suffrage or even elections (Sen 1999; Agamben et al. 2009). In the context of accelerated social transformations and a fast-changing world economy,4 with landmark technological innovations, the banalization of artificial intelligence, and the circulation of unprecedented amounts of capital across borders in search of returns, the proposition that democracy is an operationalizable
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ideal deserves closer scrutiny. Digital computation is “a force that produces and serializes subjects, objects, phenomena, but also consciences and memories and traces, which can be coded and stored and which are capable of circulating” (Mbembe 2019). Big Data and laws adopted by governments in powerful countries to have extraterritorial access to data offer new, easier possibilities for illegal political hacking and for legal political interference across boundaries—beyond the traditional, old-fashioned political interventions that have always taken place among nations.5 With the interconnectivity of economic and financial systems, increasingly sophisticated algorithms, faster and more powerful computational instruments, and progress in artificial intelligence, almost all countries now have unbridled access to national databases in other countries. This makes all nations vulnerable and all governments concerned.6 The largely muted reactions to revelations about the existence of the “Disposition Matrix” (also known as the “Kill List”), the general indifference to global eavesdropping of political and business leaders, the global acceptance of the death of privacy so that Big Data conglomerates can share information with totalitarian “democratic” governments in return for business opportunities,7 and the relativism (if not outright confusion) about standards of freedom across countries should force a rethinking of the meanings of democracy and even its possibility.8 Such idiosyncrasies are not taking place in Honduras, Equatorial Guinea, or Bhutan, but in the most “advanced democracy” and the most powerful country in the world—a country whose democratically elected president, Donald Trump, branded himself as a “stable genius” after doubt was expressed by his political opponents about his mental stability. Some “totalitarian democracies” have emerged and are relying on t hese new, subtle forms of violence to perpetuate political and economic dominance. There is also a global uprising of angry, populist movements using digital means to express political opinions and to sway public opinion or even try to achieve politi cal goals that they could not reach through the ballot box. The world is therefore getting used to violent forms of “freedom” and “democracies,” from above (totalitarian elites) and from below (populist movements). Both the new “demo cratic” totalitarianism and the “riot democracies” (démocracie de l’émeute, as French President Emmanuel Macron referred angrily to the Yellow Vest movement9) are fueled by economic and identity fears. The issue here is not that democracy is under attack, as is often stated in the mainly nostalgic literat ure devoted to recent global developments. Some researchers and commentators appear too afraid to seriously consider what has become self-evident: Democracy is both a great moral horizon and an impossible system of governance to conceptualize, apply consistently, and rigorously across time and places. This is especially relevant in a world where perceptions of economic
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inequality are growing, a world with an ineffective system of global governance (Crozier et al. 1975) and persistent imbalances in voice and power distribution between advanced industrialized nations and developing countries. This chapter is about the need for intellectual reckoning. It starts with a commentary on what I call the “great discordance”—the paradoxical gap between secular improvements in democratization and economic well-being and the still-high levels of citizen anger and disillusion around the world (section 1). It then discusses the global, unsustainable democratic deficit, and explores its foundations—from the original sins of democracy to t oday’s democratic trilemma, (i.e., the impossibility of building democratic systems that are ethical, based on efficient political institutions, and promote universal suffrage; section 2). The chapter ends with the conclusion that the main law of economics is to constantly subvert politics in ways that cannot allow democracy to be more than an abstract ideal (section 3).
1. The G reat Discordance uman societies everywhere are experiencing a g reat malaise. Despite the indisH putable acceleration of the pace of technological innovations in the past three centuries, which has brought enormous economic gains to the world, raised global income, and improved welfare and the quality of life globally, despite improvements in self-reported levels of happiness in a handful of countries, the planet is still filled with rage and anger. People in countries at all income levels are expressing deep levels of mistrust and dissatisfaction vis-à-vis the quality and effectiveness of their elected political leadership, their formal institutional systems, and the prevailing rules of the game—which they have often validated through free and fair elections. This section discusses the new global economy of anger and its paradoxical explanations, mainly in economic terms (the feeling of rising inequality).
The New Economy of Anger Anger and discontent levels around the world are high, even though most available indicators of political and economic progress are better than they have even been. This deep paradox reflects a great discrepancy: By all accounts, the world has never been a “better” place in which to live. On the broad historical front, empirical research in archeology, psychology, cognitive science, economics, and sociology suggests that t hings have never looked better for the h uman species. Any human being living t oday is much less likely to meet a violent death or to suffer from violence or cruelty at the hands of o thers than were people living in any previous known period of world history. Studies of the causes of death in different
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eras and regions yield surprising results: Analyses of skeletons found at archaeological sites suggest that 15 percent of prehistoric humans met a violent death at the hands of other persons (Pinker 2011). By contrast, in societies organized around states with some forms of government, the most violent appears to have been Aztec Mexico, in which 5 percent of p eople were killed by o thers. The violent thirteenth-century Mongol conquests alone caused the deaths of an estimated 40 million people—equivalent to 280 million people today. During the bloodiest periods of European history (the seventeenth century and the first half of the twentieth century), deaths in war were “only” around 3 percent. This “pacification process” (Pinker) was brought about by the state monopoly on the legitimate use of force. It confirmed Hobbes’s (1651) view that in the absence of a state, life is likely to be “solitary, poor, nasty, brutish and short” (Leviathan, xiii. 9). Empirical evidence shows that today’s world is less violent, less cruel, and more peaceful than during any previous period of h uman existence. The decline in violence holds for deaths in war, murders of all sorts, fights in the family, brutal tensions in neighborhoods, and the like. For instance, the chance of anyone living in Europe being murdered is now less than one-tenth, and in some countries only one-fiftieth, of what it would have been if they had lived 500 years ago. On the political front, social science research also paints a good background for optimism. Empiricists have described a generally positive democratic trend over the past three centuries. Huntington (1991) famously identified three major waves, starting in the 1820s with the widening of suffrage to a large proportion of the male population in the United States, and continuing for almost a century until 1926, bringing into being some 29 new democracies. In Huntington’s view, the ascent to power of Benito Mussolini in Italy in 1952 marked a reverse of democ ratization in the world. A second wave of democ ratization occurred after the triumph of the Allies in World War II, and a third one was initiated after the Portuguese military staged a coup against their authoritarian government, initiating profound political change that culminated in the emergence of a democratic regime. This last wave was enhanced by the fall of the Berlin Wall and the collapse of the communist regimes of East-Central Europe, and the spread of democratic ideals around the world. Huntington’s thesis has gained worldwide influence despite its weak theoretical basis, the conceptual flaws underlying his analysis, and the arbitrary classifications of political regimes he used (Monga 1996). More recently, political scientists have observed that even though many countries have succeeded in bringing down authoritarian regimes and replacing them with freely elected governments, few of them can actually be considered stable democracies. In the early 1970s, political scientists observed that t here were roughly 40 countries in the world that could be rated as more or less democratic. As Diamond (1997, 2) explains:
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The number increased moderately through the late 1970s and early 1980s as a number of states experienced transitions from authoritarian (predominantly military) to democratic rule. But then, in the mid-1980s, the pace of global democratic expansion accelerated markedly, to the point where as of 1996 there were somewhere between 76 and 117 democracies, depending on how one counts. How one counts is crucial, however, to the task of this essay: thinking about w hether democracy will continue to expand in the world, or even hold steady at its current level. In fact, it raises the most fundamental philosophical and political questions of what we mean by democracy.10 Most of the countries labeled as “democratic” in recent decades still struggle to consolidate their new and fragile democratic institutions (Diamond 2015). Parallel to the struggle to consolidate democracy is the well-observed disillusionment: participation in politics and in elections has been lower than one would have expected in many countries, while the ability of political parties and trade unions to mobilize voters and citizens has been declining.11 The high levels of mistrust of political leaders and disillusionment with democratic institutions in countries labeled “new democracies” is surprising, given the significant reported improvements in the development of liberal democratic institutions, the extension of political rights and freedoms, and peaceful turnovers of power (Paller 2013). This g reat discordance appears to be even more puzzling when analyzed against the background of empirical research on the evolution of liberty and the effectiveness of political institutions, which consistently claims that democracy has taken root in all corners of the world: Long-term trends in “democratization” (regardless of how it is defined) show generally positive developments over the past half-century, despite some hiccups (figure 1.1). The great discordance is also notable on the economic and social front. Empiricists provide strong evidence to support the thesis that t hings have also been moving in a positive direction. Living conditions around the world have improved over the past 200 years, at least at the global level. Figure 1.2 shows that in 1820, the vast majority of the world population lived in what would be considered extreme poverty today, while only a small fraction of the elite enjoyed higher standards of living (using the most common approach to poverty measurement sets, that is, a line with constant real value over time and space).12 Since then, the share of extremely poor people has declined steadily, falling below 10 percent in 2015 (though global extreme poverty rose in 2020 for the first time in several decades as the disruption of the Covid-19 pandemic aggravated the negative impacts of conflict and climate change). Similar positive trends can be observed on social issues: In 1820, 12.05 percent of the world population aged fifteen years and older was literate. In 2016, it was
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FIGURE 1.1. Global trends in governance, 1800–2017. Source: Center for Systemic Peace (2020).
86.2 percent (Roser 2017). During the same period, the proportion of the world’s newborns that died before their fifth birthday declined from 43 percent to 4 percent, illustrating remarkable improvements in global health conditions.
Stressing such “astonishing progress,” which he attributes primarily to policies supported by the world’s elites, Zakaria (2019) sums up enthusiastically how things can be viewed from the perspective of the United States: “After 400 years of slavery, segregation and discrimination in America, blacks have been moving up. After thousands of years of being treated as structurally subordinate, women are now gaining genuine equality. Once considered criminals or deviants, gays can finally live and love freely in many countries. The fact that these changes might cause discomfort to some is not a reason to pause, nor to forget that it represents deep and lasting human progress that we should celebrate.” Zakaria’s very positive assessments of the evolution of the quality of life is consistent with Pinker (2011)’s praise of the “rights revolution,” the revulsion against violence inflicted on ethnic minorities, w omen, children, homosexuals, and animals, which has developed in the second half of the twentieth c entury.
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FIGURE 1.2. World population living in extreme poverty, 1820–2015. Extreme poverty is defined as living on less than 1.90 international-$ per day. International-$ are adjusted for price differences between countries and for price changes over time (inflation). Source: Data published by World Bank and Bourguignon and Morrisson (2002).
In sum, just looking at the deep trend as measured by empiricists, global happiness should be on the rise, perhaps even exponentially. Yet sociopolitical well- being in various places around the world (in high-and low-income countries) has been marked recently mainly by anger, resentment, fears, identity conflicts, and the resurgence of populism and xenophobia. How could this be? What explains the g reat discordance between the steady improvements in global political, economic, and social welfare reported by empiricists and the recent eruptions of anger observed in many places around the world? First, social and cognitive scientists are still struggling with theoretical and measurement issues surrounding comparative analyses of political well-being (Monga 2017). Various methodological problems must be addressed to elaborate intellectual and policy frameworks for making socially acceptable political decisions. One must obviously start with valid methods for defining, understanding, capturing, and measuring the notion of individual political well-being. The methods used for individual assessments should also be extended to social groups in ways that make such measurements meaningful and credible. All this supposes that individual preferences can be measured at a satisfactory level of confidence and that the intrinsic “subjectivity” in such exercises is more than compensated
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by the “objectivity” of the methods used. Yet the innate inability of human beings to look past their intrinsically self-centered natures, their shifting egos and psyches, and their unstable preferences; the impossibility of consistently defining their own tastes, feelings, and opinions; and the structural limitations of any attempt to consistently capture and aggregate the criteria for common well-being make interpersonal comparisons of political well-being a permanent challenge. Second, it is difficult to determine rigorously whether the past was “good” or “bad,” or to assess whether life is getting “better” or “worse.” Milanovic (2017) explains this difficulty quite well. He points to the dominant narrative about the exhilarating days at the end of the Cold War and the longing “for a time when unstoppable victory of democracy and neoliberal economics was a certainty and liberal capitalism stood at the pinnacle of human achievement.” He then contrasts that intellectual consensus with his own experience. He saw the end of the Cold War as an ambivalent event, which brought national liberation and the promise of better living standards to many people in Eastern Europe, but it was also traumatic for others because of the rise of vicious nationalism, wars, unemployment, and disastrous declines in income. His discomfort with triumphalism surrounding the fall of the Berlin Wall was compounded by the rather enjoyable memories he had of his childhood in former Yugoslavia: He never had to deal with collectivization, killings, political t rials, endless bread lines, imprisoned free thinkers, and other stories that are currently published in literary magazines. On the contrary, he remembers “long dinners discussing politics, women and nations, long Summer vacations, foreign travel, languid sunsets, whole-night concerts, epic soccer games, girls in mini-skirts, the smell of the new apartment in which my family moved, excitement of new books and of buying my favorite weekly on the evening before the day when it would hit the stands” (Milanovic 2017). Yes, indeed, comparing various periods in history may seem like a straightforward exercise when relying on empirical data. In fact, it is a rather subjective task. Although lots of historical and statistical evidence confirms that life on earth used to be shorter, sicker, riskier, and less free (with citizens generally having fewer options to express themselves), it does not necessarily follow that things are “better.” As Rothman (2018) put it, “if being alive now doesn’t feel particularly great, perhaps living in the past might not have felt particularly bad. Maybe human existence in most times and places is a mixed bag. . . . By an obscure retrospective calculus, the good appears to balance out the bad. Frightening events seem less so in retrospect. Memory is selective, history is partial, and youth is a golden age. For all these reasons, our intuitive comparisons between the past and the present are unreliable.” Interpersonal comparisons of (political) well-being across time and place are conceptually as challenging as comparing a painting by nineteenth- century romanticist Eugène Delacroix to a book by Dante or García Márquez or
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Pablo Neruda. This may partly explain why many attempts to explain the great discordance have focused on the economics of political disillusionment.
The Political Economy of the Elephant Curve Why is t here so much intellectual disappointment and popular anger with the po litical, economic, and social outcomes of “democratic” regimes, including in industrialized countries, such as the United States or the United Kingdom, with the oldest and strongest institutions? The most widely accepted explanation is the complex story of the dynamics of poverty and inequality, mainly within countries. “Inequality has been named as a culprit in the populist incursions of 2016 and 2017. But what is inequality, and what role does it play in inhibiting or encouraging growth, or in undermining democracy?” (Deaton 2017). Let’s start with the global story of poverty. It has declined around the world in recent decades, and this decline should generate higher levels of life satisfaction and perhaps enhance acceptance of the prevailing political institutions, at least in countries where strong progress has been recorded. Globally, economic growth typically comes with lower absolute poverty rates (figure 1.3). The story of global inequality is different. It r ose from 1820 to about 1990, driven mainly by divergent growth processes: with the Industrial Revolution, many of today’s rich-world countries took off in the early nineteenth century (though there
FIGURE 1.3. Growth and absolute poverty. Slope = −2.2 (= 0.27). Source: Ravallion (2016).
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ere some late starters). The pattern changed dramatically toward the end of the w twentieth century (Ravallion 2020). High growth in Asia ignited a convergence process, which stimulated a decline in global relative inequality (measured using the ratios of incomes relative to overall mean) in the new Millennium (figure 1.4) The decline in global inequality has meant that economic growth has had a larger impact on absolute poverty. But in itself, this is not enough to prevent popu lar anger and political protests. P eople are concerned about both absolute in equality (the absolute differences or the gap between rich and poor), and about the extremes. To understand how this can happen, let’s consider two cities with only three inhabitants each, with the following wealth distribution: • City A: $3, $6, and $9 • City B: $6, $12, and $18 Most relative inequality measures (such as the Gini index) would indicate that there is no difference between the two cities. Yet survey results of opinions about these two distributions would show that many respondents consider City B to have higher inequality. That is the power of popular perceptions and collective beliefs, which can lead to sociopolitical tensions and even social conflicts. Looking closely at the story of changes in income distribution in the world over the two decades preceding the 2008 Great Recession, Lakner and Milanovic (2013) offer an “Elephant Chart” (figure 1.5), which has often been used to explain the disappointment with democratic political systems and the rise of populist
FIGURE 1.4. Global relative inequality, 1990–2010. Source: Bourguignon (2016).
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FIGURE 1.5. Changes in income distribution in the world, 1988–2008. Source: Lakner and Milanovic (2013).
movements.13 Examining the income growth of each percentile of the global income distribution over two decades, the chart sheds light on which one has benefited the most from globalization (the world is viewed h ere as one country). The line on the chart starts low on the far-left end (the elephant’s tail), then climbs to a peak (torso) before falling (trough) and then rising again to near-peak levels (trunk). It climbs sharply on the left to reflect how outcomes improved in the developing world from the fall of the Berlin Wall to the Great Recession. However, it also shows that the world’s poorest—most of whom reside in Africa—are only slightly better off than in the past (the elephant’s slumped “tail”). The world’s middle class rose substantially and recorded gains, mainly b ecause of the good catching-up performance of large emerging countries such as China— this is illustrated on the chart by the peak at the elephant’s “torso.” By contrast, the global upper middle class did rather poorly, with roughly zero growth in income over two decades—this is reflected by the depth of the trough at the bottom of the elephant’s “trunk.” The biggest winners are the top 1 percent, the elites among the world elites (mostly from industrialized countries), who have reaped massive income growth—shown by the elephant’s upward “trunk.” In other words, the right side of the chart shows how incomes declined dramatically for the working and m iddle classes in the developed world but soared for the planet’s wealthiest people. Some researchers chose to focus on the group in the middle of the Elephant Chart (a group assumed to represent mainly the low and m iddle classes of
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industrialized Western countries). The stagnant income at a time of increased global trade and investment was thought to be the main source of popular anger and rising identity politics in rich countries. Political conclusions w ere then drawn about the negative consequences of globalization (Krugman 2016). Yet there is no evidence or claim in the Lakner-Milanovic empirical analysis that workers in rich countries lost ground b ecause of globalization. In fact, the evidence suggests that most workers in industrialized countries in all percentiles actually did well over the period analyzed, and that several fundamental changes other than globalization were important factors in income growth over time. A subsequent study of the shape of the Elephant by Kharas and Seidel (2018) following the Lakner-Milanovic approach but using a different methodology14 and extending the coverage with new data five years into the post–Great Recession era yielded broadly similar results, with some important caveats: Their version of the Elephant Chart depicts primarily a story of convergence, with poorer countries, and the lower income groups in those countries, having grown most rapidly in the measured two decades. Their analysis does not support the conclusion that the poorest people are being left behind, nor that the rich are taking all the income gains.
Inequality as Cholesterol: The Good and the Bad In fact, the original Elephant Chart does not show how a specific group of p eople in the 80th percentile from 1988 fared over time. Rather, it compares whoever is in the 80th percentile in 1988 to whomever is in the 80th percentile in 2008, which may refer to completely different groups of populations (again, the chart takes the world as one country). To understand which groups are responsible for the shape in the chart, one must examine how the curve changes when holding populations constant and removing various countries. Corlet (2016) digs deeper in that direction, focusing specifically on the experience of low-and middle-income households in the industrialized world. His analysis shows the dangers of using a global, multidecadal graph such as the Elephant Chart to draw conclusions about particular countries and particular groups within them. He finds that overall income growth is understated b ecause of changing country selection (the globally poor in 1988 and those in 2008 are not necessarily the same groups of p eople; different countries are included in the datasets that underpin the chart over the two decades). For example, a percentile could include primarily Japanese households in 1988 and Russia in the next decade, because both countries recorded major changes in the composition of income distribution and population growth. Corlet also observes that population changes, rather than just income changes, have driven the income growth distribution in
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the Elephant Chart. Furthermore, the aggregate data hide big variations between advanced economies. In sum, “the zero growth doesn’t imply that the incomes of the 80th percentile did not grow. Rather it shows that the 80th percentile in 1988 has roughly the same income as the 80th percentile in 2008. But t hese two groups may be composed of different populations” (Freund 2016). Other factors may have determined changes in the income distribution curve. The fall of the Berlin Wall, followed by the fall of the Soviet Union, or the economic stagnation of Japan (caused mainly by its rapidly aging population) accounted for the stagnation or decline in income in those countries, irrespective of globalization. Policy shifts in some industrialized countries (especially on taxes) may also have played a role on the evolution of income for some social groups. It is therefore a leap of faith to use the Elephant Chart as evidence that globalization allowed poor countries to grow to the detriment of workers in rich countries, or to use it as a rigorous explanation for some of the unpredicted major political events the world has witnessed (Brexit, the Donald Trump election as US president in 2016, e tc.). This brings us back to the initial questions on the political significance of in equality and its potential relationships with democratic systems and the distribution of power in social institutions. “Inequality is not so much a cause of economic, political, and social processes as a consequence,” says Deaton. “Some of t hese processes are good, some are bad, and some are very bad indeed. Only by sorting the good from the bad (and the very bad) can we understand inequality and what to do about it. Moreover, inequality is not the same thing as unfairness; and, to my mind, it is the latter that has incited so much political turmoil in the rich world today. Some of the processes that generate inequality are widely seen as fair. But o thers are deeply and obviously unfair, and have become a legitimate source of anger and disaffection” (Deaton 2017). In other words, inequality can be viewed like cholesterol: T here is the good and the bad. People happily accept differentials in income or wealth that originate from perceived hard work, a brilliant innovation by an inventor, or from a great idea that makes one person or group richer than o thers. Examples of such generally accepted sources of inequality include the inventions that spurred the industrial and health revolutions in the eighteenth century, making families and a few countries in northwestern Europe well off, but eventually also improving the living conditions and health outcomes for billions of p eople around the world. As Deaton puts it, “it is hard to object to innovators getting rich by introducing products or serv ices that benefit all mankind” (Deaton 2017). By contrast, Deaton argues, p eople object to inequalities that they attribute to unfairness. This is the case when the genesis of wealth is perceived to be from state capture or other unethical activities, or even from intergenerational inheritance
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that is perpetuated or amplified by tax systems and regulations. He also suggests that another reason for growing public discontent in the United States in partic ular is that median real (inflation-adjusted) wages have stagnated over the past fifty years (Guvenen et al. 2017), and people in the Western world object to government or university-sponsored programs that seem to favor particular groups, such as minorities or immigrants. “This helps to explain why many white working- class Americans have turned against the Democratic Party, which they view as the party of minorities, immigrants, and educated elites” (Deaton 2017). The empirical evidence supporting such arguments is mixed, at best. To a certain extent, the divergence between median and top incomes in old democracies like the United States could indeed be the result of impersonal processes, such as globalization and technological innovation, which have devalued low-skilled labor and favored the well-educated. Deaton is right in suggesting that inequality is not always unfair. However, his analysis leaves out the hysteresis effects of enrichment, and the subjective ways in which political anger often expresses itself—including in old democracies. Only an extremely small number of t oday’s rich, educated elites w ere actually involved in any invention or innovation that improved life on earth. Even for the handful of families that may be associated with particular technological or scientific advances known to have created wealth, only an infinitesimal number can be viewed as benefiting from the fruits of their personal genius, talents, or luck. Then the question becomes w hether intergenerational wealth and inequities should be widely accepted. For instance, Bill Gates or Steve Jobs have indeed found new ways of using computers and boosting productivity and h uman welfare. Should their accomplishments grant (almost) infinite intergenerational wealth to their descendants, even the laziest of their heirs? By such standards, anyone with Einstein’s lineage should be entitled to lifetime riches and the potential for disproportionate levels of political and social influence. In sum, Deaton’s elegant conceptual distinction between the understandable (good) inequality and the unfair (bad) type is difficult to operationalize. It is based on the assumption that sources and uses of wealth, and the perception of wealthy people by the majority of the population, remain linear through time. That is rarely the case. Throughout human history, some deeply unethical practices have often yielded wealth that has been converted to good use. Trying to entangle which types of enrichment may be ethical and fair from the ones seen as unfair is not what angry protesters against injustice and the prevailing democratic systems do when they take to the streets, or when they choose not to vote and therefore raise abstention to levels, which may lead to questioning the legitimacy of certain elections. Empirical arguments and explanations linking political disaffection to inequality have some merit, but they remain insufficient to explain the deep lev-
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els of disillusionment observed around the world. Something more fundamental is going on: the unraveling of democratic myths in an era of global economic challenges, and the recognition that the ideals of democracy rooted in the law carry some intrinsic contradictions.
2. An Unsustainable Democ ratic Deficit here has always been broad intellectual consensus about the primacy of the law, T especially in its role as a codifier and underwriter of democratic political systems. Even people who disagree over everything tend to agree on the necessity of the law and the need to underpin it with some ethical foundations. This collective reverence for the law goes back at least to Plato’s last and longest chapter in Dialogues, which is about laws. But why is it that the perceived virtues of the law do not translate into strong collective beliefs in “democratic” countries, where laws supposedly organize public life and few doubt the wisdom of a well-informed citizenry freely picking and choosing their systems of government and their leaders? Why is there so much disappointment and anger with democratic outcomes in “democratic” countries? Recent political history in the Western world is particularly fascinating. In 2016, the great and well-educated p eople of the United Kingdom voted in a referendum to withdraw their country from the European Union. The minority who did not like the results still managed to slow down the implementation of the popular will and reopen the debate with the clear goal of reversing the outcome of a “democratic” exercise. The same deep feeling of dissatisfaction was observed after elections that w ere considered “free and fair” by the losing candidates led to power Presidents Donald Trump in the United States and Emmanuel Macron in France, and Prime Minister Victor Orban in Hungary. In all three countries, angry groups of citizens took to the streets to demonstrate their refusal to recognize these elected leaders, whom they viewed as illegitimate when they started implementing the political programs on which they had campaigned and won. In the United States, some important political leaders called for the impeachment of President Trump right a fter he took office, while the so-called Yellow Vest movement spread across France to call for the resignation of President Macron. Yet the problem, if any, may not be with any one of t hese elected leaders but with the electoral system (Maskin and Sen 2017a,b), with the rules of the game, or even with the constitutions of these countries, which have been in force for decades and centuries and are generally considered as settled framework not to be amended, except in exceptional circumstances.15 While the rationale for restraining the propensity to change constitutions and laws is understandable, as
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societies set rules to build enduring institutions, it also highlights one of the intrinsic contradictions of democratic consolidation: Why should people be bound by political principles and even institutions designed centuries earlier, in a world in constant flux? Chesterton once wrote: “Tradition means giving a vote to most obscure of all classes, our ancestors. It is the democracy of the dead” (1908, 85). A modern-day autocrat would probably welcome the opportunity to change a country’s constitution and the rules of the political game any time, as often as necessary, to accommodate the political majority of the day, under the justification that such a system would ensure that the political architecture reflects the will of the p eople at any given moment. The ensuing political instability may just be the trade-off and the cost to bear to ensure that the citizens always have their say in how to continuously improve a democratic system. Intriguing questions on the relationship between democratic systems and economic governance also arise when mainstream political leaders in “matured” democracies publicly state their strong belief that their country has turned to authoritarianism. Less than two years after leaving office, former French President Nicolas Sarkozy publicly accused his successor François Hollande of using the judiciary to pursue a personal vendetta against him. Sarkozy criticized the government and compared his country’s judiciary to the East German Stasi (secret police). Judges had ordered Sarkozy’s telephones tapped in the context of an investigation into his campaign finances. In an open letter titled “What I Want to Say to the French,” Sarkozy (2014) wrote: It is my duty today to break this silence. If I do so, it is because the sacred principles of our republic are trampled underfoot with unprece dented violence and absence of scruples. . . . Who could have imagined that, in 2014 in France, the right to privacy would be v iolated by telephone taps? The right to secret conversations between a lawyer and his client willfully ignored? . . . The right to presumption of innocence desecrated? Calumny established as a government method? The justice of the republic manipulated through calculated leaks? . . . Even today, anyone who calls me knows they will be listened to. You’re reading correctly. This is not an excerpt from the wonderful film Other P eople’s Lives about East Germany and the activities of the Stasi. It’s not about the abuses of some dictator. . . . It’s about France. . . . It would be laughable if it weren’t a question of fundamental republican principles. The France of human rights has clearly changed. (Translation mine) Similar public statements of disbelief vis-à-v is the validity of democracy with independent judiciaries were also made recently by former presidents of Brazil
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(Luiz Inácio Lula da Silva and Dilma Rousseff) and South Korea (Park Geun-hye and Lee Myung-bak) when they were removed from office or sentenced to jail. The fact that they presided over very successful tenures at the helm of their nations did not protect them from what they considered to be politically motivated charges by perverted political and judiciary institutions. How can such strong, contradictory statements by credible political leaders who held the highest office in democratic countries be understood?
The Original Political Sin Researchers around the world have struggled to make sense of the troubling recent political developments, their meaning, and their significance. A very large body of literat ure has erupted not just in the social sciences and the humanities but also in the “hard” sciences, with a wide range of commentaries and explanations of the reasons b ehind the so-called “crisis of democracy.” Some have gone back to the appropriate scope of democracy and democratic systems, reopening the old debate on whether they should be l imited to the design and implementation of institutions and rules for political governance and freedom, or whether they should also cover issues of social and economic equity to foster the development of inclusive societies (Held 1987). O thers have attributed recent turmoil to the exponential development of technology in the age of enhanced globalization, with the infinite new ways of using new digital tools and platforms and even artificial intelligence to heavily influence and manipulate political actors and determine political outcomes. Few researchers have questioned the continued validity and relevance of the highly abstract notion of democracy in a world where all its theoretical foundations and assumptions and its practical prerequisites (clearly defined citizenship acting freely on the basis of accurate information, well-functioning and neutral judiciary and administrative technostructure, e tc.) are clearly unstable and often unreliable. Without a reexamination of the preconditions and requirements for democracy to mean more than a nice ethical horizon, analyses of the current “crisis” mainly reveal a broad intellectual malaise. In their puzzled assessment of the state of democracy in the world, Pinker and Muggah (2018) observe that democracy has spread from one country to more than 100 countries in the space of two centuries but has also suffered setbacks along the way, and it continues to face resistance to this day. They conclude with the Churchillian statement that “democracy, after all, is not inevitable, and yet it remains the best system of governance compared to the known alternatives.” It’s a valiant and elegant attempt to rescue what is clearly one of the boldest h uman ideas. But it is also a naïve statement: The disappointments with the idea of democracy have been around since its inception.
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In his exploration of effective and ethical forms of government, Plato noted in The Republic that democracies emerge as a result of discontent with oligarchy. But he quickly warned that democracies are susceptible to “tyranny of the majority” and rule by demagoguery for t hose who can subvert and use the institutions to their advantage (Sterling and Scott 1985). Plato even saw democracy as potentially more dangerous than oligarchy, as it motivates the anger of the poor (the largest social group) against the wealthy rulers, which eventually leads to anarchy and chaos. In fact, he pessimistically predicted modern-day populism and its poisonous effects on “democratic” systems. While the descent into tyranny has not occurred in countries that have credibly labeled themselves as democratic and have been largely viewed as such, the various degrees of popular discontent after democratic consultations in such places as the United States, the United Kingdom, or even the Philippines and Venezuela, point to the deep dissatisfaction with political systems that on paper are viewed as ideal. There have always been mixed feelings about democracy, including from its strongest proponents. On one hand, its ideals are compelling and generally viewed as highly ethical, regardless of place and time. On the other hand, its implementation blueprint has often led to disagreements and impasses. Centuries ago, based on doubts about the optimality of universal suffrage and the recognition that not all citizens could ever have the same levels of understanding of critical issues (and the Bell curve distribution of educational levels in all countries), some societies came up with various strategies and mechanisms for making their representative democracies less vulnerable to and less dependent on the views of uneducated citizens. One of the intrinsic contradictions of the democratic utopia is the basic fact that all voices are supposed to be given the same political weight, as all voters are considered equal, regardless of their backgrounds, understanding of the issues on the ballot, and even though they may hold different or even opposite beliefs and degrees of commitment to the ethics of democracy. With this postulate, the result of a democratic election is by definition the mere summation of opinions expressed in votes cast by people who may disagree even on the need for a democratic system, and certainly on the meanings and ideals of what that system should be. The rather primitive accounting exercise of amalgamating random thoughts and preferences that are often poorly developed by voters with a wide range of views on what citizenship is (or should be) is the original sin of democracy. Throughout human history, taxation has been used not only as a means to fund the state but also as a criterion for legitimating citizenship.16 Political philosophers and theorists, struggling with the challenge of operationalizing the ideal of democracy (power to every citizen) in a way that does not give the same weight to the
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votes of citizens of different levels of understanding of the issues of the polity, thought they could use the capacity to pay taxes as a justifiable and morally acceptable discriminant. By setting a certain level of tax contribution as a threshold of eligibility to be a voter, they could differentiate among citizens and ensure that only those able to pay would be voters. P eople in this category (mainly landowners, aristocrats, businessmen, and nobility) w ere assumed to be informed and educated enough to grasp and make good choices in the issues in play during elections. To ensure high-quality debates without excessive conflicts among policymakers, John Locke recommended in the late seventeenth c entury that a smaller and more homogenous section of the p eople be allowed to participate in legislation “in proportion to the assistance which it affords to the public” (Sigmund 2005, 79). A by-product of this decision was often the logically limited amount of tax revenue available for redistribution and the relatively small size of the public sector. At the 1787 Philadelphia Constitutional Convention, the same approach was considered, with several delegates suggesting the adoption of multiple voting rights depending on wealth. It took Madison’s skills of persuasion to convince the framers of the US Constitution that the creation of the Senate with equal powers was a better mitigating tool for the propensity to tax by the House of Representatives (Schön 2018). Systems of suffrage based on a tax threshold (suffrage censitaire) were also adopted during the French Restoration and were praised as a balanced approach to liberal democracy by many influential thinkers. Even g reat minds such as Tocqueville (2004 [1835], chapter V) and Stuart Mill (1873 [1861], chapters 8 and 15) advocated such a discriminatory electoral system, not realizing that the very idea of making voting rights contingent on a particular level of wealth was a violation of the basic principle of demos-kratos: Excluding some people from full citizenship b ecause they cannot afford to pay tax is an undesirable way of giving them voice and achieving democracy. These conceptual challenges have not yet been addressed satisfactorily—not even in the most advanced democracies. In some mature democracies, the proper criteria for assessing the degree of fairness of the voting process itself is still marred with controversies. In the United States, each major election is still tainted with charges of voter suppression.17 In Europe, the politics of taxation and citizenship is still generating heated debates and anger, especially in an era when globalization of the world economy and the complexification of rules allow some of the largest international corporations to “optimize” their accounting strategies and minimize their contribution to public finances. In sum, several centuries a fter the Enlightenment and despite nearly universal consensus on the ideal of democracy, the world is still nowhere near a basic
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common understanding of how it should be defined, implemented, and customized to a country’s circumstances to reflect changing voter preferences. As noted by Engerman and Sokoloff (2005), extreme variation in the extent of political in equality among citizens in the same countries emerged early across the colonies established by the Europeans around the world. T hese contrasts have persisted over time through systematic differences in the ability and inclination of elites to shape legal frameworks to advantage themselves.
A Democratic Trilemma It is tempting to consider the observed lapses in “democratic” countries as resulting only from poorly designed social and political institutions, as being the consequences of capitalism and globalization gone wild, or as reflecting the behavior of cynical political entrepreneurs who can cleverly engineer ways of riding popu lar anger and discontent about inequality or about “threatening” illegal migrants. Such analyses assume that democracy is a reasonably well-understood ideal, and that several centuries of intellectual debates and experiments (mostly in advanced industrialized economies) have led to a widely shared agreement on how to implement it successfully (a set of concepts, institutions, rules and regulations, and policies and practices). Nothing could be further from the truth. Despite numerous “foundational” documents, international covenants, and treaties, and a general agreement on a few basic, first-order principles, there is still no framework for credibly assessing democratic progress and consolidation in ways that are comparable across countries (Monga 2015). All popular indices measuring democratization in the world (Polity IV, Freedom House Index, e tc.) are based on subjective and often random assessments of what a mainly Western concept of democracy is supposed to mean across time and space. As a result, some version of habeas corpus (which has evolved considerably even in the United Kingdom since 1215) is subjectively evaluated by outside observers in twenty-first century Alaska, Angola, or Afghanistan. Not surprisingly, strong authoritarian leaders in Bolivia, Burundi, or Bhutan, who reject universalism and base their own judgment on relativism, oppose both the vague (Western) definition of democracy and the false “conventional wisdom” on how it should be implemented and monitored. Many political leaders in Asia also disregard Western approaches to democracy and articulate their own approaches to it, often focusing on meritocracy.18 Even in the Western world, where one would expect a strong, stable consensus on democracy, its scope, modus operandi, and criteria for validation, the disagreements among the players in the polity are regularly so deep that political arguments are still often settled through the instrumentalization of the courts or
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through violent protests. That is why a French president elected on a clear platform of reform can be forced by a minority of violent protesters to make major policy reversals. It is also why a former French president can publicly accuse the government of his country of Stasi-like methods of government. That is why a majority of the p eople of the United Kingdom can vote in a referendum to leave the European Union (Brexit) and yet have their democratically expressed request overruled by a political class not e ager to act on it. The main reason for the disappointments and constant uneasiness about the democratic ideal is the trilemma preventing its full implementation. It is indeed impossible for any society to achieve ethical democracy, as stated for centuries by political philosophers and theorists and codified in a set of general principles by the international community since the 1948 Universal Declaration of H uman Rights, while also having efficient political institutions and giving full voice to all the people’s choices (through universal suffrage). T hese three objectives are impossible to achieve simultaneously. First, as stated in most constitutions around the world, ethical democracy would require a well-informed citizenry committed, if not to high morals, then at least to the highest standards in their quest for truth. This in itself is hard enough to achieve, given the challenges of defining what the truth is or getting accurate information that all citizens can process independently in the era of “fake news.” Second, the goal of efficient political institutions—defined as delivering in a timely and cost-effective manner a set of widely accepted laws, rules, and regulations, ensuring that they are actually implemented and effectively monitored— would entail more than the traditional forms of representative or participative democracy currently in existence. In principle, representative democracy provides a second layer of protection and safety mechanisms to ensure that not all wishes of the people are taken at face value and that the political system is stable. Yet in both “democratic” and “undemocratic” countries, voters and citizens are often deeply disappointed with the quality of their political representatives, as evidenced by the often very low approval ratings of their parliamentarians. Participative democracy allows citizens to get more directly and more often involved in setting national priorities, selecting key policies, and deciding how to implement or stop them. However, it can slow down the functioning of the political system or create an atmosphere of constant uncertainty and fears of policy reversals that reflect the shifting public mood. Third, reliance on universal suffrage to give voice to every citizen and the broadest legitimacy to the strategic choices and policies made in the polity entails granting e very voter the absolute same level of trust in their “good” judgment. It also assumes that well-informed (and hopefully well-educated) voters will wisely and honestly make “good” decisions—whether for themselves or for
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FIGURE 1.6. A democratic trilemma.
society as a w hole, without giving in to popular fantasies. Yet this objective is unrealistic, at least beyond a population of a certain size. Even in well-educated social groups, exit polls after elections always show a very wide range of preferences and determinants to their political choices. Following Rodrik (2011), it can be said that a democratic trilemma makes it impossible to achieve three of the major goals that constitute democratic ideals (figure 1.6). They are mutually incompatible: One can combine any two of the three, but never have all three been combined simultaneously and completely. This is a major reason for the global disenchantment with politics, the law, and globalization.
Market Failures in Democracy In the memorable opening sequence of the movie Spectre, James Bond is chasing a hitman trying to bomb a major parade in Mexico during a celebration of the “Day of the Dead.” In a rational quest for survival, they exchange fire as they try to kill each other, but only end up demolishing buildings, which fall on them. After miraculously escaping from the ruins, they keep fighting in a flying heli copter, which hovers and swoops in the air, both protagonists again making rational individual decisions that can only lead to bad outcomes for both of them. Citizens and voters act in the same way. That is why political markets are messy everywhere—including in the so-called “advanced democracies.” Both on the supply and demand sides, actors are often selfish and unstable in their preferences, and the rules (written and unwritten) are therefore unpredictable and unreliable. Social norms, group beliefs, and irrational fears play out in unexpected ways and are often compounded by external interference (by powerful international financial institutions imposing painful economic policies, influential countries seeking to promote their preferred candidate, or malevolent stakeholders and malicious
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hackers manipulating voters through fake news). Yet theories of democracy generally assume the existence of well-functioning institutions and systems, through which the supply of political ideas by rational political entrepreneurs (or other actors) and demand for such goods and serv ices from citizens are mediated in political markets. These markets are assumed to have accurate and adequate information and are refereed by free media and other honest (if not “neutral”) brokers. It is surprising that several centuries of political thought have relied on such an improbable set of assumptions. Democracy market failures occur everywhere and can be defined as inefficient production and distribution of political goods and serv ices in supposedly f ree countries, resulting in net political and social welfare loss. Political markets exhibit externality problems, even when they are deemed f ree (and therefore subject to the equalizing laws of supply and demand). T hese externalities make the quest for democracy and the process of democratic consolidation always chaotic or random. The individual incentives for “rational” behavior do not lead to “rational” outcomes by various groups or for the society. In other words, even when each citizen or voter makes what he/she perceives subjectively as the “appropriate” decision for him/herself, t hose decisions often prove to be suboptimal or even wrong and disruptive, in a steady state disequilibrium. A good indication of this is the trivial fact that few candidates would be elected to high office in any advanced democracy by campaigning on a fully truthful platform about the policies they actually intend to implement if elected.19 The emergence, spread/dissemination, legitimation, and consolidation of democracy can be fostered or impeded by positive and negative externalities. In all political markets—whether they are classified as democratic or not—positive po litical externalities arise when some citizens benefit from the actions taken by the few who are willing to take risks and even pay a high price to successfully advance the agenda of freedom. Of course, the risk-taker citizens cannot charge others for these benefits and might therefore not go as far as they would like. The quest for democracy should therefore account for the free-rider problem. Negative externalities also occur when one person’s actions harm another. When polluting, factory owners might not consider the costs that pollution imposes on o thers. More often than not, externalities undermine the political and social benefits of individual selfishness in the quest for democracy. If selfish citizens do not have to pay any price to enjoy the benefits of freedom and democracy, they will not pay. And if selfish political leaders do not believe that they w ill be rewarded for political works and risks, they will not devote their time, energy, and resources to the fight for democracy and freedom. An invaluable individual good, such as democracy or freedom, would not then materialize. As Friedman (1996, 278) states, the externality problem “is not that one person pays for what someone else gets
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but that nobody pays and nobody gets, even though the good is worth more than it would cost to produce.”
“Democracy is for the Gods,” Bradatan (2019) asserts. “Just scratch the surface of the human community and soon you w ill find the horde.” He adds: Fundamentally, humans are not predisposed to living democratically. One can even make the point that democracy is ‘unnatural’ because it goes against our vital instincts and impulses. What’s most natural to us, just as to any living creature, is to seek to survive and reproduce. And for that purpose, we assert ourselves—relentlessly, unwittingly, savagely—against o thers. We push them aside, overstep them, overthrow them, even crush them if necessary. Behind the smiling façade of human civilization, there is the same blind drive towards self-assertion that we find in the animal realm. Such a somber prognostic echoes the analysis of zoologist Lorenz, who studied the aggressive behavior of animals and related his findings to the complicated nature of h umans and modern society. It is “unreasoning and unreasonable human nature” that leads “two political parties or religions with amazingly similar programs of salvation to fight each other bitterly” (Lorenz 1966, 228–229). It is also that same animal, bestial, self-destructive drive that explains why an estimated 480,000–507,000 p eople have been killed in the post-9/11 wars in Iraq, Af ghanistan, and Pakistan (Crawford 2018, 1).20 This tally of the counts and estimates of direct deaths caused by war violence does not include the more than 500,000 deaths from the war in Syria, raging since 2011. The tally is an incomplete estimate of the h uman toll of killing in t hese wars. As Crawford also notes, it does not include “indirect deaths.” Indirect harm occurs when wars’ destruction leads to long-term, “indirect,” consequences for p eople’s health in war zones, for example, b ecause of loss of access to food, w ater, health facilities, electricity, or other infrastructure. Democracy is not a bad idea or an unworthy ideal. On the contrary. The point here is that it may just be too noble a horizon for h umans to achieve, given their consubstantial taste for violent conflicts and oppressive manners, the genetic incompetence to address their own shortcomings, and their innate ability to credibly cast themselves as ethical creatures. H uman societies have tried to mitigate the risks posed by their basic instincts and to mediate the disorderly political pro cesses of conflicting claims from individuals and social groups by setting up vari ous democratic institutions and adopting written and unwritten rules and other social norms.
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In any political system, policies reflect the institutions and rules that determine resource allocation. Political actors choose to support, resist, or distort particu lar institutions or policies, depending on their interests and capabilities. As noted by Khan (2018, 636), “the distribution of organizational power can therefore determine the institutions and policies that are likely to persist as well as the ones most likely to be developmental in that context. This directs our attention to the importance of accurately identifying the relative power and capabilities of relevant organizations that describe a particular political settlement and how these may be changing over time.” The starting point of the reasoning here is that institutions function very differently across countries, because their political contexts are different. This has important implications for the design of governance priorities in different countries. The critical “democratic” questions then become the identification of the powerful and influential social groups, the criteria for the distribution of power among them, and how both the groups and the rules must change and evolve over time—hopefully as the economy grows and t here are more income and rents to be shared. Holding power is partly based on income and wealth but also on historically rooted capacities of different groups to organize. “A political settlement emerges when the distribution of benefits supported by its institutions is consistent with the distribution of power in society, and the economic and political outcomes of these institutions are sustainable over time” (Khan 2010, 25). In advanced countries, the distribution of power largely reflects the distribution of incomes generated by formal institutions and rights. In contrast, the distribution of power in developing countries is essentially a competition among informal sociopolitical institutions. This is the justification for a political settlements framework, which acknowledges that the distribution of organizational power is important for understanding the economic and political effects of institutions and policies (Khan 2018). Self-proclaimed advanced democracies typically address these problems in two ways. The first is by setting rules for lobbying, defined as “the process of political influence by corporations and other business interests on elected officials or appointed bureaucrats through means of information or other resources—e.g., campaign contributions or employment opportunities—in the adoption, retention, or amendment of public policy” (Bombardini and Trebbi 2019, 2). The second way is by trusting that their independent judiciary serves as a referee of last resort to rule on political fights and disagreements. While these solutions seem ethical and elegant, they fall short of addressing the core problem of fairness and equality among all citizens, which is the cornerstone of democracy. The main question about lobbying is whether it is a legitimate and valid political mechanism “to represent their client’s interests by
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educating lawmakers and their staff about the effect any proposed legislation or regulation w ill have on their client . . . [and] to petition the government,” as the US National Institute for Lobbying and Ethics (a trade association representing American lobbyists) indicate in their mission statement (n.d.), borrowing from the First Amendment of the US Constitution. Or is it a mechanism allowing powerful businesspeople to legally distort public policy from the social optimum, subvert democracy, and create opportunities for state capture and corruption? Regardless of how transparent and stringent the rules on lobbying are, empirical studies show that they almost always lead to suboptimal and often unethical outcomes.21 As for the independence of the judiciary, it has been challenged regularly in all so-called advanced democracies, often by the very people at the highest levels in government whose primary responsibility is to monitor the rule of law: world leaders US President Donald Trump, French President Nicolas Sarkozy, and Brazil’s Presidents Dilma Rousseff and Lula da Silva, among others, have publicly expressed strong opinions about the politization (“weaponization”) by their opponents of the judiciary in their own countries. Whether their claims were factually accurate m atters little. If the first magistrate of an “advanced democracy” is of the view that the country’s democratic system is not functioning well or has been hijacked by his/her political opponents, the end result w ill be dis appointing: large fractions of voters and citizens in the United States, France, and Brazil feel the same about their political systems as do many people in Venezuela, Burundi, or Myanmar. Democratic market failures are also obvious in the structural problems exhibited by judicial systems everywhere. Some “advanced democracies” claim color- blindness but enact policies that scapegoat marginalized social groups. For instance, in the United States, an increasingly high number of citizens lose their voting rights and are disenfranchised by the inimical l egal system that is supposed to protect them from political abuse. Since the 1980s, the US prison population has risen from about 300,000 to more than 2 million. This trend has been fueled by drug convictions, with a disproportionate number of new felons being African Americans. Legal scholars have shown that this is not coincidental: B ecause first-time drug offenders can face ten years imprisonment in many states, thousands of African- Americans, fearing these mandatory sentences, enter plea bargaining and find themselves in jail for crimes they did not commit (Alexander 2010). On release, they are pushed into a shadow society, where employment opportunities are non existent, and trapped in “a closed circuit of marginality.” Evidence of discrimination by the judicial system is provided by the following facts. In 2000, the National Institute on Drug Abuse reported that white students used crack cocaine at eight times the rate of black students; and while cocaine is indeed a scourge in
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US society, drunk driving (by white men 70 percent of the time) results in far more violent deaths, yet drunk drivers are often charged only with misdemeanors. Such structural problems in the judicial system—which is the main monitoring and regulatory institution in all political markets—make the quest for sustainability and validity of democracy everywhere almost a matter of subjective appreciation.
Myths of the Representative Citizen and Omniscient Political Agents The scene, broadcast live on television worldwide in November 2011, shocked the world. Standing on the podium among eight fellow Republican presidential candidates at Oakland University in Michigan, Texas Governor Rick Perry sought to prove he had the best ideas, know-how and leadership skills to pull the United States out of its worst period of economic stagnation since the G reat Depression. He turned toward his toughest opponent, fellow Texan Senator Ron Paul, looked him in the eyes, extended his left arm in a very compelling manner and gestured to highlight his argument: “I w ill tell you: it’s three agencies of government when I get there that are gone,” he stated forcefully. Counting with his fingers: “Commerce [raising his thumb], Education, [raising his index finger], and the . . . [raising his middle finger] what’s the third one there? . . . Let’s see . . . [touching his forehead in embarrassment].” (Reilly 2016) The crowd erupted in laughter and disbelief. It was terrible optics for the governor of one of the largest states in the United States running for president and not being able to remember the three departments of government that he had identified as deserving to be shut down if elected. In his stump speech on the campaign trail in the previous weeks, he had mentioned the Energy department as the third one to be abolished. That evening, on live telev ision, Governor Perry was pushed by the moderator of the debate to finish his thought: “But you can’t name the third one? “The third agency of government . . . I would do away with Education, the . . . Commerce [after one of his opponents came to his rescue and reminded him], and . . . let’s see . . . [looking at his note while grimacing] I can’t . . . the third one . . . Sorry. I can’t . . . Oops!” It was a painful episode to watch, regardless of how one felt about Governor Rick Perry. The video clip of the sequence went viral. The following days, the
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headlines were about “the worst stumble of the presidential campaign.” Governor Perry quickly dropped out of the race. Fast forward, five years later. President Donald Trump, newly elected, picked the former Texas Governor as Energy secretary, the very department whose name he famously forgot in the telev ision debate. During his tenure as governor, Rick Perry called for lighter regulation of the oil industry and referred to the science around climate change as “unsettled.” He was picked to oversee the development, stewardship, and regulation of energy resources, safeguard the nuclear arsenal, and promote America’s energy policy. Environmental groups reacted angrily to his nomination and confirmation by the US Senate, calling his selection “an insult to our functioning democracy.” Fast forward, two more years. US Secretary of Energy Rick Perry talked for 22 minutes on the phone with a man he thought was the prime minister of Ukraine. In fact, he was actually speaking to a Russian prankster known for targeting high-profile politicians and celebrities. During the call, the man in charge of the world’s biggest stockpile of nuclear warheads was misled to discuss with hackers US coal exports to Ukraine, a proposed energy pipeline across the Baltic Sea, and a (fake) new source of fuel derived from manure and homemade alcohol (Wootson 2017). Such a level of vulnerability for a country whose democratic institutions are supposed to be the strongest and have been functioning for centuries is surprising. Again, one must remember that this was not happening in Azerbaijan, Bolivia, or South Sudan, but in the United States of America, the country whose defense budget is the largest in the world. Perhaps no one should have been surprised about how all this unfolded in one of the world’s oldest democracies. First, that Governor Rick Perry struggled to recall the name of one of the three government agencies he vowed to cut if elected president should not have been disqualifying: His disastrous brain-freeze on live television in 2011 simply showed that he was only human, despite being a major political figure. A fter the debate, Perry’s campaign advisors had sought to contain the damage by describing the stumble as “a human moment” and “authentic.” They could have just explained that Rick Perry was an ordinary h uman being. Likewise, the outrage at his intellectual meltdown under pressure in front of a global television audience mainly reflected the unrealistic expectation of constant brilliance and infallibility, which viewers, voters, and citizens have vis-à-v is po litical figures. Democracy is supposed to function well with good and ethical leaders who have emerged from a competitive process mediated by legitimate institutions and social norms. Yet political markets are structurally dysfunctional everywhere in the world, b ecause they involve fallible and often unreasonable actors, both on the demand and the supply sides, and t here are no neutral “regulatory” authorities to ensure predictable outcomes of the interactions. In economics,
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the price mechanism and the often clearly identifiable interests of the various agents can help predict the outcomes with a high degree of accuracy. That is rarely the case in politics, where the heterogeneity of agents is acute, and their stated individual goals and preferences are more unstable (Monga 2017). The rational choice models used by political scientists and democracy theorists to study political markets often assume the existence of a mythical representative citizen (or political leader or voter). All such rational citizens are supposed to behave and act in such a manner that their cumulative actions might as well be the actions of one agent maximizing his/her expected political utility function. Researchers construct representative agents to deal with the complicated issue of aggregation (the summing up of individuals’ behaviors to derive the be havior of a political market or an economy). The biggest assumptions underlying such a reasoning is that political markets are complete (in the economic sense; that is, they offer at least as many assets with linearly independent payoffs as t here are states of the world, and every political agent can exchange ideas, serv ices, or goods, with every other agent without substantial transaction costs). Theories of democracy also assume that political markets are competitive and that citizens and voters have homogeneous beliefs and time-additive, state-independent utility functions that are strictly concave, increasing, and differentiable. This is obviously not the case, not even in “advanced democracies.” Modeling the behavior of one person given some preferences and constraints is a rather straightforward exercise. Modeling the behavior of a group of people, or an entire economy, is a more challenging and less elegant task. Still, it is an unrealistic assumption to consider that the choices of all the diverse voters, citizens, and political leaders in the polity—even in one small village—can be viewed as the choices of one “representative” standard utility–maximizing individual whose choices coincide with the aggregate choices of heterogeneous individuals. Real-life political stories of the Rick Perry type also show why democracy theories—based on the reduction of the behavior of heterogeneous agents (politicians and citizens) to a single, stylized version of what it should be—may be analytically convenient but are utterly unrealistic and lead to misleading conclusions, even if all these agents are utility maximizers. Such models are particularly ill suited to studying politics, which often involves coordination failures. Unfortunately, the more promising analytical approaches, which focus on heterogeneity of agents and interactions among individuals, are still rarely used in the study of politics and democracy (Kirman 1992; Maliar 1999). Rick Perry was a “representative” political agent only in the sense that all his competitors supplying politi cal goods and serv ices could have exhibited the same flaws that he displayed on telev ision. He was not a stylized, imaginary, well-informed and infallible utility maximizer in the supposedly free market of politics.
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There is wide consensus among political theorists that an educated, well- informed, and well-meaning citizenry aware of and concerned with individual (personal) and collective (social) interests is indispensable for democratic consolidation. Yet little empirical evidence supports that proposition. Nations with the largest share of highly educated citizens do not necessarily fare well on mea sures of democratization—regardless of the validity of these indicators. Countries such as the United States and the United Kingdom exhibit the highest mean years of schooling in the world (13.4 and 12.9 in 2017, respectively).22 Yet their electorate is prone to abrupt shifts in mood due to the sirens of populism, for instance, and their supposedly educated voters and citizens appear as vulnerable to fake news and political manipulations as those living in countries with low levels of mean years of schooling, such as Afghanis tan (3.8) or Burkina Faso (1.5). The embarrassing question then becomes whether even highly educated citizens can be trusted to make “good” and “free” judgments in their important civic duties and to make their legitimate democratic systems function properly. The weak correlation between schooling and democratic ethics is even more apparent when one looks at India, the most populous and therefore “largest democracy in the world.” One can only be puzzled by the deep sociopolitical trends observed there in recent decades. Despite failing to deliver on his 2014 campaign promises to bring stronger economic growth to India and rid the country of corruption and dynastic politics, Prime Minister Narendra Modi was reelected in 2019 with an even greater mandate. During his first term, his government had to weather the fallout from a disastrous demonetization scheme. Ethnic violence also increased significantly—fueled by the rise of Hindu nationalism (Hindutva). As perplexed political experts searched for explanations, Sharma (2019) commented: “We do not live in Modi’s India. We live in Indians’ India, and the reason so many Indians adore Modi is b ecause he represents their preferred conception of the Indian nation. No other explanation for [his] results is as compelling.” Modi’s reelection against the backdrop of lower-than-anticipated economic performance and heightened political violence can also be analyzed as evidence of the breakdown of the unethical political equilibrium, which has been part of Indian politics for decades. On one side are some extreme proponents of Hindu nationalism who have been trying to create a dominant Hindu identity; on the other side are caste-based parties or region-based parties opposed to the emergence of Hindu majoritarianism. Modi’s success reflects the prominence of the former group—and his ability “to mobilize a fairly wide cross-section of Indians across different castes into a larger Hindu narrative” (Pratap Bahnu Mehta, quoted in Chotiner 2019). It is perplexing that these two forces—neither of which would be described as truly embodying the democratic ideals and values as articulated, for instance, by
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Sen (1999)—helped keep India’s political system stable only by neutralizing each other. It is even more bewildering to notice that both groups have been striving and sustained with support from well-established and deeply entrenched local, traditional, religious groups and nongovernmental organizations. A fter all, such civil society organizations are expected to serve as backbone for the design, implementation, and monitoring of democratic institutions (Diamond 1994; Monga 1996; Putnam 2000; Tocqueville 2004). The b attle of narratives between proponents of Hindu cultural majoritarianism and those protecting “lower” caste identities complicates the quest for ethical, altruistic forms of democracy. In fact, many of t hese groups are uncivil societies, as they can produce negative social capital (Monga 2009). All these examples illustrate a global picture of democracy as one of the brightest h uman ideas but still more abstract than practical, and certainly not rooted in a valid theory of free political markets with representative citizen and omniscient political agents.
3. The Law of Economics: How to Gain Democ ratic Credentials One would have thought that some 2,422 years after the Greeks articulated the need to associate the notions of “demos” and “kratos,” more than 800 years after the Magna Carta, 243 years after the American Revolution, and nearly three quarters of a century after the adoption of the Universal Declaration of Human Rights by the “international community,” h uman societies must have articulated and learned enough about democratic forms of governments to be able to formulate and implement a broadly accepted consensus on what the fundamental principles and modus operandi are. One would have expected that philosophers, political theorists, and other social scientists would have offered by now a robust framework for comparative analyses of the levels and effectiveness of democ ratization processes around the world. Yet the world is far from it, as shown by the semi-chaotic transition between the presidencies of Donald Trump and Joe Biden in the United States in 2020–2021. Even the oldest “democracies” seem to function in ways that are reminiscent of regimes that are classified as autocracies, often with leaders at the highest levels of responsibility acting in ways that are considered unlawful and utterly immoral by their own peers. The traditional excuse that when such undemocratic and unethical patterns of behavior occur in countries with strong, independent, and credible legal systems, those systems are keeping even the most powerful politicians in check no longer holds: The judiciary has been politicized, instrumentalized, or
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circumvented in most “democracies” (Alexander 2010). In some advanced democracies, the prevailing laws and regulations grant more than enough space to political leaders to act in ways that would be viewed as autocratic, illegal, and immoral in developing countries with political and legal systems labeled “undemocratic.” Perhaps the most glaring recent illustration of this is the way the international community, self-proclaimed guardian of democratic values and models of good global governance, reacted to the medieval-style murder of the famous Saudi journalist Jamal Khashoggi in 2018. The US president, leader of the F ree World, issued a statement (White House 2018) that read: The world is a very dangerous place! . . . The crime against Jamal Khashoggi was a terrible one, and one that our country does not condone. Indeed, we have taken strong action against those already known to have participated in the murder. After great independent research, we now know many details of this horrible crime. We have already sanctioned 17 Saudis known to have been involved in the murder of Mr. Khashoggi, and the disposal of his body. . . . This is an unacceptable and horrible crime. . . . That being said, we may never know all of the facts surrounding the murder of Mr. Jamal Khashoggi. In any case, our relationship is with the Kingdom of Saudi Arabia. They have been a great ally in our very important fight against Iran. The United States intends to remain a steadfast partner of Saudi Arabia to ensure the interests of our country, Israel and all other partners in the region. . . . After my heavily negotiated trip to Saudi Arabia last year, the Kingdom agreed to spend and invest $450 billion in the United States. This is a record amount of money. It will create hundreds of thousands of jobs, tremendous economic development, and much additional wealth for the United States. Of the $450 billion, $110 billion w ill be spent on the purchase of military equipment from Boeing, Lockheed Martin, Raytheon and many other great U.S. defense contractors. If we foolishly cancel these contracts, Russia and China would be the enormous beneficiaries—and very happy to acquire all of this newfound business. It would be a wonderful gift to them directly from the United States! If there was ever a public, “official” announcement of the death of democracy, whatever it meant, it is probably that self-explanatory statement by none other than the occupant of the White House. The dazzling candor from the leader of the most powerful democratic country in the world delegitimizes the notion that there is an ethical global order out there, and that people living in autocracies should aspire to. It also annihilates the romantic dream that advanced democratic coun-
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tries carry and hold dear a set of values that make their political systems “better” and give credibility to the human collective quest for morality in governance. As striking as it may have appeared, the White House statement of moral equivalence between the extraordinary killing and dismembering of the body of a journalist in plain sight, and the decision to ignore it (beyond even symbolic verbal criticism) so as to preserve some business transactions was nothing unusual. For centuries, the leaders of powerful “democratic” countries have behaved in a similar way and consistently shown willingness to overlook the crimes of allied countries and autocrats deemed strategically valuable to their interests. Strategic amnesia has often helped many world leaders lower the standards of global political governance and renege on their democratic duties by silently condoning brutal practices by authoritarian regimes identified as friendly. Researchers have documented the brutality and negative externalities of military, active political interventions conducted by Western powers to overthrow democratically elected leaders in Iran (Mohammad Mosaddegh in 1953), Chile (Pinochet in 1973), and Congo (Patrice Lumumba in 1960). These Western powers have also freely selected and appointed political leaders inclined to support their mainly economic interests (Péan 1983, 2014; Smith and Glaser 1992, 1997). This problem is pervasive: Several UN secretaries general who have released their memoirs after their tenure at the helm of the world’s multilateral political body have revealed the propensity of leaders in supposedly democratic countries to condone, if not organize, undemocratic practices around the world (Boutros-Ghali 1999; Annan 2013, 2014). In the name of liberty and democracy, to be spread throughout the world, international law has also been instrumentalized to create new norms of global governance applied inconsistently, as they actually serve to identify and punish political leaders from non-Western countries viewed as undesirable. The International Criminal Court (ICC), created to judge individuals for genocide, war crimes, crimes against humanity, and aggression, has been the main tool for such calculated arbitrariness. Its jurisdiction and legal process have been crafted to grant broad leeway to the most powerful countries in the world, whose leaders can pick and choose their targets for referral to the ICC: Prosecutions are for crimes committed by a State Party national, or in the territory of a State Party, or in a State that has accepted the jurisdiction of the ICC; or the crimes must have been referred to the ICC prosecutor by the UN Security Council pursuant to a resolution adopted under chapter VII of the UN charter. T hese two conditions have allowed the world superpowers to basically decide who should be prosecuted by the ICC, which means arrested and imprisoned for many years while awaiting trial—even though in a number of high-profile cases, the ICC itself ended up dropping all charges and releasing political leaders whose life and careers had been
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ruined.23 Moreover, the fact that powerful UN Security Council member countries, such as the United States, China, and Russia (some of whom are quite vocal on their defense of freedom and democracy in the world), have not even ratified the ICC’s founding treaty (Rome Statute), has led to strong opposition in many parts of the world about its legitimacy.24 Finally, tactical repentance is also used by the “leaders of the F ree World” (typically after leaving office) as a way of expressing remorse or to try to justify their inaction in the face of egregious violations of human rights, or their military interventions around the world in violation of international law. One would have expected that world leaders who engage in costly wars in foreign countries far away from their national boundaries would have learned from the Vietnam War mistakes, well acknowledged by former US Defense Secretary Robert McNamara, who led that war effort. Yet they still engage in wars not authorized by the UN Security Council, and they selectively and inconsistently overthrow authoritarian regimes (sometimes a fter supporting them for long periods of time). A fter classified documents released in 2004 revealed that the Clinton administration knew of a “final solution to eliminate all Tutsis” well in advance of the 1994 genocide, which left some 800,000 p eople dead in just a few weeks in Rwanda, the former US president admitted: “If we’d gone in sooner, I believe we could have saved at least a third of the lives that w ere lost . . . it had an enduring impact on me.”25 Likewise, after he left office, former US President Barack Obama said that failing to prepare for the aftermath of the 2011 ousting of Libyan leader Muammar Gaddafi was the “worst mistake” of his presidency. Libya became “a mess” (Obama’s words quoted by Goldberg 2016) and fell into a long civil war that spread into neighboring countries. If the “international community,” self-identified as the custodian of liberty and democracy, is actually an evolving u nion of Western heads of state whose value scale depends much less on moral standards and ethical practices than on their random perceptions of their often-changing countries’ interests, if the propensity of world leaders to speak out or to act in defense of their own conception of human rights and freedom is inversely proportional to the business deals available to their firms, then democracy has to be unmasked: It is an ineffectual concept, especially when used for comparative political analysis. What conclusion can be drawn from all this? What should developing-country tyrants do to find acceptance as legitimate members of the club of world leaders committed to the virtues of “democracy” and the rule of law? The Machiavellian straightforward answer is that building or advertising the wealth of their nations and picking their allies from among the superpowers are the real criteria for being granted membership in the democracy club.
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Recent global political developments have simply confirmed that the very idea of democracy is still mainly an abstract ideal for h uman societies struggling to come up with the most ethical and ambitious modes of self-government. Democracy does not lend itself easily to the big questions it was supposed to address at inception: Who should measure, assess, and judge the quality of freedom and democracy and political well-being in general, and what framework should be used to do it? From a comparative perspective, anchored in a set of constitutional and legal texts and widely accepted political and social norms, democratization has always carried an intrinsic contradiction. On one hand, a prescriptive universalist approach based on strong (if not rigid) specific principles and modus operandi derived from international covenants and valid in all places and at all times would make democratization a totalitarian framework. Moreover, the postulate that founding documents (such as constitutions) should not be tampered with, except in exceptional circumstances requiring near unanimous consensus, negate the very basis of law and freedom, which is legitimacy. Why should American citizens in the twenty-first century be bound by political decisions and preferences expressed from 1776 and 1787 by a group of “Founding F athers” (most of them slave o wners) who successfully led the war for independence from Great Britain, wrote the Declaration of Independence, and inspired the US Constitution? Why should French citizens in 2019 be compelled to live their lives under a Constitution adopted in 1958? For how long should such adherence to political “traditions” go on? On the other hand, a totally flexible approach to assessing democratization, allowing for particular features and preferences (or lack thereof) in various nations and regions at various times, would make it a more vulnerable political concept: It could be hijacked by cultural relativists and autocrats around the world to justify oppressive forms of government. Yet beyond these conflicting approaches, there is a need to organize the polity in ways that make it stable, legitimate, and also reflective of constantly evolving social preferences (Monga 2015). Humans claim to be the most sophisticated and intelligent beings who have ever lived in the universe. This assertion is based on the presumably superior nature of the human brain and the many spectacular achievements of the species— from sending humans to the moon to building robots who may soon be able to “think.” The breathtaking creativity of the h uman mind, the relentless passion for research, and the remarkable pace of innovation observed around the world over several millennia can indeed be viewed as preliminary evidence of the seemingly inexhaustible capabilities of one of the species of primate. Still, this intrinsically bright species has remained incapable of finding the appropriate institutions and laws for governing themselves democratically in a world where economic
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interests determine the ethics of governance and ultimately shape individual and collective behavior.
Notes 1. The entire process is carried out under the executive branch of the US government— with no role, no checks, and no oversight of any kind by the US Congress or by the judiciary. All decisions, the basis for making them, their implementation, and evaluation are secret. 2. In some ways, this new global chase fits into the long history of manhunts and resembles the great hunts of the past—tracking, cornering, controlling, and capturing (Dorlin 2017). 3. Interestingly, in the early 2000s, when then–US President George W. Bush invoked executive privileges to justify his refusal to disclose the memoranda from his Office of Legal Counsel (OLC) that legally authorized torture of presumed terrorists, rendition (the clandestine delivery of prisoners in US custody to other countries, where they can be subjected to harsh interrogation techniques), warrantless eavesdropping, and other bizarre practices, some well-known American lawyers, such as Dawn Johnsen (President Obama’s first choice to lead the OLC), opposed it. They denounced the Bush practice as a grave threat to human rights, democracy, and freedom, warning that “the Bush Administration’s excessive reliance on ‘secret law’ threatens the effective functioning of American democracy” and “the withholding from Congress and the public of legal interpretations by the [OLC] upsets the system of checks and balances between the executive and legislative branches of government” (Greenwald 2013). President Obama repeatedly refused to disclose the principal legal memoranda prepared by his own OLC lawyers that justified his “disposition matrix” and kill lists. He vigorously resisted lawsuits from institutions friendly to his administration (such as the New York Times and the American Civil Liberties Union) to obtain the OLC memorandum. Eventually, a “white paper” produced by the lawyers of the US Department of Justice was released, purporting to justify the US president’s power to target even Americans for assassination without due process. It was presented as a summary of the still concealed confidential memorandum and titled: “Lawfulness of a Lethal Operation Directed against a US Citizen Who Is a Senior Operational Leader of Al-Qa’ida or an Associated Force.” It basically equates any government accusation of terrorism with proof of guilt. In other words, a few p eople in the executive branch of the government simply have to assert without the burden of evidence or trial that any person anywhere on earth is a terrorist, to be believed at face value, and be granted the legal right to “dispose” of that person as they deem appropriate—with indefinite imprisonment or death. 4. The center of gravity of the world economy has moved from West to East, with China becoming the biggest contributor to global growth and soon to be the largest economy. Defying doomsday predictions, China’s authoritarian political system has resisted shocks and crises, to the point of being viewed as an alternative model of governance to countries in various corners of the world (Bell 2015). 5. See Johnson and Clack (2015) on the consequences of military interventions. 6. In 2017, China adopted its National Intelligence Law that requires all its organizations and citizens to assist authorities with access to information. The Chinese law, which the United States claims is a tool for espionage, interference in national political matters, and possible manipulation of voters, has been cited by President Donald Trump’s administration as a reason to avoid doing business with companies like Huawei Technologies Co. The following year, the United States enacted the Cloud Act (or the “Clarifying Lawful Overseas Use of Data Act”), requiring all US cloud serv ice firms (Microsoft, Amazon,
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IBM, etc.) to provide US authorities with data stored on their servers regardless of where it is housed (Fouquet and Mawad 2019). 7. “Humanity is on the verge of being reborn in a second form thanks to an intrinsic transformation of the horizon of calculation and an almost indefinite expansion of the apparatus of quantification” (Mbembe, 2019). 8. A good illustration of one of the rather naïve initiatives to revitalize the idea of democracy is the 2019 “Declaration of Principles for Freedom, Prosperity, and Peace” issued by a group of self-proclaimed “citizens, former officials, and representatives of governments and private entities, united by common values” (https://www.atlanticcouncil.org/wp-content /uploads/2019/02/Declaration_of_Principles.pdf). The declaration starts with the observation that many p eople, including citizens in “free” societies, have grown skeptical of democracy, open markets, and international institutions, and that nationalism, populism, and protectionism are ascendant, with “authoritarian” powers such as China and Russia seeking to weaken “Western solidarity and liberal values.” This manifesto then claims that for seven decades, free nations have drawn on common principles to advance freedom, increase prosperity, and secure peace, and that “the resulting order, built on the foundation of democratic values and human dignity, has brought better lives for our citizens and billions of p eople around the world.” Ironically, the manifesto ignores the fact that much of the increase in global prosperity observed in the world in the past four decades was due to China (which the authors of the manifesto consider to be a threat to freedom and Western values) and was also responsible for a large fraction of the reduction in poverty in the world. 9. The French Yellow Vest protest movement began in November 2018 as an act of defiance against the government’s plan to raise fuel taxes, a decision presented as a mea sure to help France combat global climate change. It then became a rallying cry against President Emmanuel Macron (elected less than two years e arlier), perceived by many as an out- of- touch “president of the rich.” Crowds started protesting every Saturday throughout the country, demanding higher wages as well as greater social and fiscal justice. In some places, the protests turned into riots that rampaged against banks, businesses, and some iconic monuments. 10. See also Monga (2002) for a theory and empirics of democratic consolidation. 11. Gallup polls indicate that in August 2018, Americans’ approval of the work the US Congress stood at only 17 percent, which was also about average for the previous 17 months. See https://news.gallup.com/poll/240896/congressional-approval-steady-low-august.aspx. 12. Extreme poverty is measured by World Bank researchers. It refers to p eople living on less than $1.90 per day. It takes into account nonmonetary forms of income, which are important for poor families relying on subsistence farming. The extreme poverty mea sure is also corrected for different price levels in different countries and adjusted for price changes over time. For a discussion of the pros and cons and the methodological challenges in this approach and the general issues with global poverty lines, see Basu (2015a,b) and Osberg and Xu (2008), and Deaton (2005). 13. Washington Post journalist O’Brien (2016) commented that it is “the most impor tant chart for understanding politics t oday.” 14. The Kharas-Seidel (Kharas and Seidel 2018) method, called a quasi-non-anonymous growth incidence curve, holds the country composition of each global decile or vigintile constant across time, which sheds light on the gains or losses of specific economic classes in specific countries over time. This study is based on h ousehold survey data only, which is typically weak in coverage of the bottom and top of the distribution. 15. The fact that a widely accepted founding rule of democracy is to refrain from changing the fundamental law governing it (even if it is several centuries old, like the US
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Constitution) prevents or considerably limits the opportunity for experimentalism (Kyvig 1996). 16. This idea of taxes reflecting the consent of the governed already appeared in the 1215 Magna Carta and in the 1689 Bill of Rights of England. It culminated with the popu lar slogan “no taxation without representation,” heard during the American War of Inde pendence against Britain. The same idea is reflected in the French 1793 Declaration of Human and Civil Rights, Article 14. The flip side of the same argument could be viewed in France’s 2018–2019 Yellow Vest movement and the Tea Party movement in the United States in the 2000s, for example. 17. Many countries around the world allow citizens living abroad to vote without being subject to tax back home, while resident aliens are subject to tax without the right to vote (Schön 2018). 18. Chinese political leaders have publicly expressed doubts about Western democracy. In 2017, China’s Communist Party (CPC) issued a blueprint and guide to explain how their “meritocratic political system” mitigates the randomness effects of the type of demo cratic pop u lism observed in the Western world. See http://www.idcpc.org.cn/english /picgroup/201605/t20160503_82487.html. 19. French newsmagazine Le Point (November 17, 2016) had as its headline: “Peut-on être élu sans raconter n’importe quoi?” [“Can one be elected to office without promising nonsense?”] 20. For instance, the war in Afghanistan has gone on for four decades and has been at a stalemate for a number of years. In 2018, the Armed Conflict Location & Event Data Project (ACLED) pronounced Afghanis tan the most lethal conflict in the world in terms of battle-related deaths. 21. On empirical analyses of the welfare consequences of lobbying and special interests, see Blanes et al. (2012), Bertrand et al. (2014), De Figueiredo and Richter (2014), and Stratmann (2002, 2005). 22. Source: Human Development Index Statistical Appendix 2018. New York: United Nations Development Programme. 23. Perhaps the most notorious case is that of former President of Côte d’Ivoire Laurent Gbagbo, put on trial in 2011 on accusations of orchestrating “unspeakable violence” to hold on to power after losing an election in 2010. The trial was presented as a landmark in the history of the ICC. Fatou Bensouda, the ICC’s chief prosecutor, vowed to “leave no stone unturned” in investigating alleged crimes by all sides in the conflict. Yet in January 2019, Gbagbo was acquitted by the ICC. While the prosecutor has appealed the decision, the initial ruling of acquittal has weakened the credibility and reputation of the court as a politically independent institution working for justice and democracy. 24. Skepticism about the impartiality of the ICC has been compounded by the fact that since its creation in 2002, most of the cases brought to its jurisdiction have targeted African political leaders, several of whom were acquitted after being put on trial for years. In the meantime, terrible tragedies, such as the Iraq and Syrian wars, have not yet triggered any prosecution. This has led many leaders of the African Union to consider quitting the ICC. 25. Interview with Tania Bryer on CNBC Meets, March 13, 2013.
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World Bank Group, Washington, DC. http://documents.worldbank.org/curated/en /914431468162277879/Global-income-distribution-from-the-fall-of-the-Berlin-Wall -to-the-great-recession. Lefort, C. 1994. L’invention démocratique. Paris: Fayard. Levitsky, S., and D. Ziblatt. 2018. How Democracies Die. New York: Crown. Lorenz, K. 1966. On Aggression. London: Routledge. Maliar, S. 1999. “Heterogeneity and the Representative Agent in Macroeconomics.” PhD dissertation, Universitat Pompeu Fabra, Barcelona. Maskin, E. S., and A. Sen. 2017a. “The Rules of the Game: A New Electoral System.” New York Review of Books, January. Maskin, E. S., and A. Sen. 2017b. “A Better Way to Choose Presidents.” New York Review of Books, June. Mbembe, A. 2019. “Deglobalization.” Eurozine, February 18, https://www.eurozine.com /deglobalization/. Milanovic, B. 2017. “How I Lost My Past.” Global Inequality Blog, September 16, http:// glineq.blogspot.com/2017/09/how-i-lost-my-past.html. Monga, C. 1996. The Anthropology of Anger: Civil Society and Democracy in Africa. Boulder: Lynne Rienner Publishers. Monga, C. 2002. “A Theory of Democratic Consolidation.” Democracy & Development: Journal of West African Affairs, Rains Edition 3(1): 5–25. Monga, C. 2009. “Uncivil Societies: A Theory of Sociopolitical Change.” World Bank Policy Research Working Paper 4942, Washington, DC. Monga, C. 2015. “Measuring Democracy: An Economic Approach.” In C. Monga and J. Y. Lin (eds.), The Oxford Handbook of Africa and Economics, Vol. 1: Context and Concepts, 427–452. New York: Oxford University Press. Monga, C. 2017. “The Economy of Tastes, Feelings, and Opinions.” Working Paper 270, African Development Bank, Abidjan, Côte d’Ivoire, https://www.afdb.org/fileadmin /uploads /afdb /Documents /Publications /WPS -270 _The _Economy _of _Tastes __Feelings__and_Opinions.pdf. O’Brien, M. 2016. “This May Be the Most Important Chart for Understanding Politics Today.” Washington Post, January 13, https://www.washingtonpost.com/news /wonk/wp/2016/01/13/this- may-be-the-most-important-chart-for-understanding -politics-today/. Osberg, L. S., and K. Xu. 2008. “How Should We Measure Poverty in a Changing World? Methodological Issues and Chinese Case Study.” Review of Development Economics 12(2): 419–441. Paller, J. 2013. “Political Struggle to Political Sting: A Theory of Democratic Disillusionment,” Polity, 45(4), October. Péan, P. 1983. Affaires africaines. Paris: Fayard. Péan, P. 2014. Nouvelles affaires africaines: Mensonges et pillages au Gabon. Paris: Fayard. Pinker, S. 2011. The Better Angels of Our Nature: Why Violence Has Declined. New York: Viking Books. Pinker, S., and R. Muggah. 2018. “Is Liberal Democracy in Retreat?” Project Syndicate, March 30, https://www.project-syndicate.org/onpoint/is-liberal-democracy-in -retreat-by-steven-pinker-and-robert-muggah-2018-03. Ravallion, M. 2016. The Economics of Poverty: History, Measurement, Policy. New York: Oxford University Press. Ravallion, M. 2020. “On Measuring Global Poverty,” Annual Review of Econonomics 12: 167– 188, https://www.annualreviews.org/doi/pdf/10.1146/annurev-economics-081919 -022924.
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Reilly, K. 2016. “Rick Perry Infamously Forgot About the Department of Energy. Now He Might Lead It.” Time, December 13, https://time.com/4598910/rick-perry-department -energy-oops-gaffe/. Rodrik, D. 2011. The Globalization Paradox: Democracy and the Future of the World Economy. New York: W. W. Norton & Company. Roser, M. C. 2017. “The Short History of Global Living Conditions and Why It M atters That We Know It.” https://ourworldindata.org/a-history-of-global-living-conditions -in-5-charts. Rothman, J. 2018. “Are T hings Getting Better or Worse?” New Yorker, July 23, https:// www.newyorker.com/magazine/2018/07/23/are-things-getting-better-or-worse. Sarkozy, N. 2014. “Ce que je veux dire aux Français.” Le Figaro, March 21. Schön, W. 2018. “Taxation and Democracy.” Unprocessed paper, New York School of Law, April 24. Sen, A. 1999. “Democracy as a Universal Value.” Journal of Democracy 10(3): 3–17. Sharma, M.S. 2019. “Don’t Blame RG: He Is Not Why Modi Has Crushed Congress.” NDTV.com, May 23, https://www.ndtv.com/opinion/dont-blame-rg-he-is-not-why -modi-has-crushed-congress-2041123. Sigmund, P. E. (ed.). 2005. The Selected Political Writings of John Locke. New York: W. W. Norton & Company. Smith, S., and A. Glaser. 1992. Ces messieurs Afrique. Paris: Calmann-Lévy. Smith, S., and A. Glaser. 1997. Ces messieurs Afrique. Des réseaux aux lobbies, Vol. 2. Paris: Calmann-Lévy. Sterling, R. W., and W. C. Scott. 1985. Plato: The Republic. New York: W. W. Norton & Company. Stratmann, T. 2002. “Can Special Interests Buy Congressional Votes? Evidence from Financial Serv ices Legislation.” Journal of Law and Economics 45(2): 345–374. Stratmann, T. 2005. “Some Talk: Money in Politics. A (Partial) Review of the Literature.” Public Choice 124: 135–156. Stuart Mill, J. 1873 [1861]. Considerations on Representative Government. New York: Henry Holt & Company. Tocqueville, A. de. 2004 [1835]. Democracy in America. New York: Library of America. US National Institute for Lobbying and Ethic. (n.d.). Mission statement, https://www .lobbyinginstitute.com/about. The White House. 2018. “America First!,” Statement, November 20. Wootson, Jr., C. R. 2017. “Listen to Russian Pranksters Trick Rick Perry into a Conversation about Pig Manure.” Washington Post, July 26. Zakaria, F., 2007. The Future of Freedom: Illiberal Democracy at Home and Abroad. New York: W. W. Norton & Company. Zakaria, F., 2019. “In Defense of the Elites.” Washington Post, February 2, https://www .washingtonpost .com /opinions /we -have -a -bleak -v iew -of -modern -life -but -the -world-is-making-real-progress/2019/01/31/6ee30432-25a8-11e9-ad53-8244862 80311_story.html.
2 THE THIRD FUNCTION OF LAW Its Power to Change Cultural Categories Karla Hoff and James Walsh To categorize is to render discriminably different things equivalent, to group objects and events and people around us into classes, and to respond to them in terms of their class membership rather than their uniqueness. —Jerome Bruner et al. (1956)
How does law change society? In the rational actor model, law affects society only by changing individuals’ incentives and information—the command and coordination function of law. In the view that individuals are social animals with an innate desire to follow social norms and punish norm violators, law is also a guidepost for social norms (the expressive function of law) (Sunstein 1996). We propose a third function of law using the insight from cognitive science and social psychology that individuals are boundedly rational and cannot think without categories and other schemas, many of which are cultural.1 The categories mediate individuals’ experience of the world. By making possible new kinds of social interactions, prototypes, and role models, law can transform cultural categories. The categories have framing effects that influence behavior by enabling or constraining perception, associations, and interpretations. We call this the schematizing function of law. The evolution of beliefs about how people make decisions is evident in the US judicial history of racial segregation.2 In Plessy v. Ferguson (1896), racial hostility was treated as based on nature. Justice Brown argued that “[l]egislation is powerless to eradicate racial instincts.” Fifty years later, in Brown v. Board of Education (1954), Chief Justice Warren argued that segregation shapes individuals’ self-schemas: To separate [Black c hildren] from others of similar age or qualification solely because of their race generates a feeling of inferiority as to their status in the community that may affect their hearts and minds in a way unlikely ever to be undone. 55
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Another fifty years later, Justice Breyer argued in a dissent to Chief Justice Roberts that segregation “perpetuated” racism: The context here is one of racial limits that seek, not to keep the races apart, but to bring them together . . . segregation policies did not simply tell schoolchildren “where they could and could not go to school” . . . they perpetuated a caste system rooted in the institutions of slavery and 80 years of legalized subordination.3 Considerable research in the behavioral sciences supports the views of Chief Justice Warren and Justice Breyer. Experience creates cultural categories; salient cultural categories influence how people think of themselves and o thers. At the stroke of a pen, law can issue a command but cannot change how p eople think, and yet, law can make possible experiences and exposure that over time do exactly that. This essay has two main arguments, an analytical one and a policy one.
The Analytical Argument The analytical argument is informed by research in many fields, particularly the social-psychological and philosophical literatures on schemas (or, equivalently, mental models). The main points are these: 1. By exposing individuals to new kinds of social situations, prototypes, and potential role models, law may, in a time frame relevant to policymakers, change cultural categories and the contexts that activate particular categories in ways that change social norms and legitimize changes in legal rights. Categories are largely defined by prototypes (Rey 1999; Smith and Medlin 1999). Exposure to new prototypes may change the meaning of a category and the self-image of its members. Law has a schematizing function.4 2. We cannot think without categories.5 The categories we use influence perception and construal. Categories are often essentialized (Rothbart and Taylor 1992; Haslam et al. 2000; Mahalingam 2003). They influence beliefs about how it is natural and appropriate for members of particular groups to behave (Goffman 1963) and suggest implicit theories about how the world works. 3. The cultural categories learned in a society in which ascriptive groups have unequal legal rights promote behaviors that make group inequality persist long after the abolition of inequality in formal rights. Cultural categories
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are conditioned by historically relevant forms of thought (Berger and Luckmann 1967; Boyd and Richerson 1988; Bruner 1990; Sen 1992; Nisbett and Cohen 1996; DiMaggio 1997; Nunn 2012; Hoff and Stiglitz 2010 and 2016; Demeritt and Hoff 2018) and by the accessible exemplars (Kahneman and Tversky 1973; Tversky and Kahneman 1973). Institutional practices constitute categories with particular meanings, and the categories influence how p eople see themselves, how they behave, and how they are treated. So pernicious and stigmatizing are some group stereotypes that they “get inside the head” of members of the stigmatized groups and undermine their performance and their efforts to improve their lives (see the survey by Hoff and Walsh 2018). Negative stereotypes impair performance in school settings (Steele and Aronson 1995; Hoff and Pandey 2006, 2014), the job application process (Linos et al. 2017), and the workplace (Davies et al. 2005). Some discrimination against groups is based on a rational calculation (statistical discrimination; see List 2004), but there is evidence that does not fit well with this account and is explained better by the effect of cultural categories on attention, interpretation, and preferences (Goldin and Rouse 2000; Bertrand and Mullainathan 2004; Shayo and Zussman 2011; Alesina and La Ferrara 2014; Bartoš et al. 2016). Beyond the instrumental harms that a stigmatized group identity may cause, it matters for intrinsic reasons (Anderson 1999; Wolff and De-Shalit 2007; Wolff 2015): “Lack of respect, though less aggressive than an outright insult, can take an equally wounding form. No insult is offered another person, but neither is recognition extended; he or she is not seen as a full human being whose presence matters” (Sennet 2003, 3). Laws that mandate behavior that deviates sharply from popular views of appropriate behavior can be ineffective, or worse. Kaushik Basu (2018, 57) uses game theory to argue that if a law is enacted to direct a society to an outcome that could not have been an equilibrium in the absence of the law, it “is doomed to not be implemented.” Two dramatic examples are laws in India that were intended to help wives and daughters but caused many to be killed. In colonial India, enforcement of the right of w idows to inherit property from their husbands strengthened the norm of widow immolation (sati; Kulkarni 2017). In the period for which data are available, 1815–1821, the enforcement of inheritance rights for w idows led to an average increase per district of between 115 and 437 w idow immolations (the mean number of immolations in a district was 153 where the districts gave w idows inheritance rights, and 25 where they did not). The group most strongly opposed to inheritance rights for widows were the Brahmins. An increase in the proportion of Brahmins in a district of one percentage point led to an average increase of between 56 and 102 burned on the funeral pyre of their husbands.
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In modern India, legislation of equal inheritance rights for d aughters and sons has increased female feticide, excess female infant mortality, and son-biased fertility stopping (Bhalotra et al. 2017; see also Rosenblum 2015). Kulkarni (2017, 479) concluded from his work on colonial India that “egalitarianism requires egalitarians.”
The Policy Argument Starting from a stable system with “matched” institutions and ideational patterns (Lieberman 2002), to use law to change society requires a kind of one-two punch. A one-two punch is defined as “two forces combining to produce a marked effect.”6 The two forces we focus on here are a change in rights (the command and coordination function of law) and a change in experience or exposure that creates cognitive foundations for the change in rights (the schematizing function). Like the one-two punch in a boxing match, the two forces independently might have little impact and yet, together, they have a large effect. In general, the one-two punch requires the enactment of multiple laws, but there are exceptions. One exception is the 1993 Norwegian law that reserved four weeks of parental leave for fathers. Fathers who took the paternity leave usually did this when the child was about ten months old, an age when a child forms attachments. The leave affected the evolution of household roles: it increased paternal care for the children fifteen years later (Cools et al. 2015). This one Norwegian law exercised all three functions of law: (1) the command function— the law required firms to offer paternity leave, (2) the expressive function—the law expressed as a social value that a f ather should bear some child care responsibility, and (3) the schematizing function—the law ensured that more fathers would have the experience of paternity leave, which durably changed beliefs about what a “good father” does.
Par t I: The Mechanics of M ental Models Boundedly rational people (that is, all of us) have schematic structures that are both representations and information-processing mechanisms. These structures are called mental models or, equivalently, schemas (Axelrod 1973; Brewer and Treyens 1981; Brewer and Nakamura 1984; DiMaggio 1997). Bartlett (1932, 201) provides one of the earliest accounts of a mental model: It is “an active organ ization of past reactions, or of past experiences, which must always be supposed to be operating in any well-adapted organic response” (emphasis added). M ental models
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include categories, identities, stereotypes, and causal narratives that animate our mental lives (Carey 2009). They give us presuppositions and default assumptions about how the world is and how it works. In many cases, our use of mental models to process information is automatic and subconscious (Bargh and Pratto 1986). Mental models influence how we allocate our attention and retrieve information. Whereas society plays no part in how the rational actor thinks, it plays a key part in how humans think: “The schematic mental structures that help us make sense of what we perceive . . . are usually based on intersubjective, conventionalized typifications”; they cause us to “ ‘see’ [the world through] sociomental lenses grounded in particular social environments” (Zerubavel 2009, 31; emphasis in original). Individuals are, thus, more likely to perceive and to recall information that is germane to their mental models and to resist disconfirming evidence (DiMaggio 1997 reviews many examples). Since cultural m ental models are transmitted across generations, the social environments of long-distant ancestors may influence how individuals perceive the world. Suppose that institutions arbitrarily forced a group of persons (call them a “race” or “caste”) into the bottom rungs of society, making it customary for them to be treated in certain ways. Many years later, suppose that the legal basis of the institutions was abolished. Nonetheless, the m ental models that underlie the customs might persist indefinitely. North (2005, 52) argues that the “interaction of beliefs, institutions, and organizations in the total artefactual structure makes path dependence a fundamental factor in the continuity of a society.” The basic idea is not new. Tocqueville (1990 [1835], 357) wrote in Democracy in America that the real problem among the moderns is that of altering the customs, not the law. Three sources of m ental models operate over very different time spans. Over millions of years, evolutionary processes have embedded representational capacities in h umans. Over generations, sociocultural processes have created repertoires of cultural mental models. And in our lifetimes, each of us creates idiosyncratic m ental models (Carey 2009, 447–448; Zerubavel 2009). The focus of this chapter is on the sociocultural space, where “the social order operat[es] on individuals’ minds. . . . Institutions have [a hold] on our processes of classifying and recognizing” (Douglas 1986, 3, emphasis added). Repertoires of categories and other mental models evolve in response to the social patterns and exemplars to which social groups are exposed (Smith and Medin 1999). Recognition of the influence of cultural m ental models on cognition sheds new light on the domain of choice. In standard economics, actions are a function (f ) of incentives and endowments; preferences are treated as fixed, and beliefs in equilibrium are consistent with available information.
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Equation 1: Actions = f (incentives, endowments). Behavioral economics introduces two additional sets of variables: the context of decision making (which does not affect material payoffs but does influence what is salient to the decision maker) and m ental models (which are both representa tions and information-processing mechanisms). Boundedly rational individuals do not perceive their full set of opportunities and cannot imagine their full set of possible lives. The subset of things they perceive and consider depends on context and the mental models that are activated. Taking into account the additional variables that influence the choices people make extends the function: Equation 2: Actions = g (incentives, endowments, context, mental models). Laboratory experiments that manipulate the labels of a game illustrate the impact of context on behavior. In the prisoner’s dilemma game, a player has a choice between generously cooperating or acting selfishly. In an experiment where US college students played this game, half the subjects were told that they were playing the “Wall Street Game,” and the other half w ere told that they were playing the “Community Game” (Liberman et al. 2004). Sixty-seven percent of the subjects cooperated when they were told they were playing the “Community Game,” but only 33 percent cooperated when they were told they were playing the “Wall Street Game.” The mental model elicited by the context (the label) had a large effect on behavior. A field experiment in Germany shows that experience can have a substantial effect on prosociality (Kosse et al., 2020). The participants were disadvantaged children. The study provided a randomly selected set of the c hildren with a volunteer mentor for one year to give the child the experience of “an unrelated and highly prosocial attachment figure taking responsibility and devoting effort and time with him/her.” The children who had this one-year experience are the treatment group, and the other c hildren (who did not have this one-year experience) are the control group. Two years after the program ended, a set of standard laboratory experiments that reveal prosociality (including the dictator game) showed a significant increase in prosociality in the treatment group relative to the control group. This suggests that the experience changed the preferences of the treatment group durably. Contrary to the assumption of traditional economics, experience may change preferences in ways that matter for economic outcomes. Although we include mental models as the independent variable in equation 2, policy can only indirectly influence the repertoire of mental models by guiding experience and exposure. A randomly assigned roommate in college (Boisjoly et al. 2006), success in the application of a citizen of Pakistan for a visa to travel
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to the Hajj (Clingingsmith et al. 2009), and broadcasts of Globo soap operas in a municipality in Brazil (La Ferrara et al. 2012) all expose individuals or communities to new people or new stories and thereby change their judgments of what is acceptable and desirable. But policy does not control the mental models that mediate an individual’s experience of the world. Recognizing that perception and preferences are influenced by the cultural categories and stories in people’s heads greatly expands the set of economic equilibria. As the sociologist Paul DiMaggio (1997, 280) writes, it implies that “large-scale social change may be caused by large-scale, more-or-less simultaneous frame switches by many interdependent actors.” The remainder of the first part of this chapter presents two examples to illustrate the power of m ental models to explain economic outcomes. Part II illustrates the ability of law and policy to change mental models.
Example 1. M ental Models of Gender That Produce Inequality in a Laboratory Game In industry and academia, there is a low proportion of women in the top ranks, and a high proportion of women in the lower ranks. A factor contributing to this polarization is the way women and men allocate their on-the-job time between tasks that affect c areer advancement and tasks that do not. For example, in for- profit firms, high-promotability tasks are revenue-generating; low-promotability tasks include orienting new employees and organizing a Christmas party. In universities that emphasize research, high-promotability tasks are research-related, and low-promotability tasks include advising undergraduates. Many people feel a sense of obligation to spend some time on tasks that help their organization at the cost of advancing their careers. But Babcock et al. (2017, 715) show that in US industry and academia, it is w omen who disproportionately do the tasks with low promotability. Why? To investigate this, the researchers invented a very simple game and played it with US college students. The participants in each experimental session are seated in one large room, each with his or her own computer. They play the game for ten rounds. At the start of each of the ten rounds, the players are randomly divided into new three-person groups. Interactions are anonymous and one-shot. A player makes a decision in each round whether or not to volunteer to “invest.” As soon as a group member volunteers, or two minutes have elapsed (whichever comes first), the round ends. Table 2.1 shows the payoffs. A decision to invest increases the payoff of each member of the group, but by a lesser amount to the investor ($1.25) than to the non-investors ($2.00). If nobody in the group invests, the payoff to each player is $1.00. Thus, a player has a
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TABLE 2.1. Payoffs per round in the volunteer-to-invest game IF NO ONE VOLUNTEERS TO INVEST
IF SOMEONE, FOR EXAMPLE, PERSON A, VOLUNTEERS TO INVEST
Person A
$1
$1.25
Person B
$1
$2
Person C
$1
$2
FIGURE 2.1. In mixed-gender sessions, females volunteer more than males for the low-rewarded task. Source: Babcock et al. (2017).
material self-interest to volunteer only under the belief that the other two players in the group will not volunteer. In every round, nearly e very player waited to see w hether someone else in the group would volunteer to be the investor. Most investments w ere made in the last two seconds of a round. In mixed-gender sessions (which were about half men and half women), the women volunteered almost 50 percent more often than the men. The line graph in Figure 2.1 shows that in every round, the probability among women that someone invested was always substantially greater than the probability among men. The line representing women’s behavior fluctuates from a probability of 0.4 to 0.3 from rounds one to ten, while the line for the men hovers around a probability of 0.25, decreasing in the later rounds. Does the gender difference in behavior reflect differences in traits? Should one conclude from t hese results that women are nicer than men? No. When the experi-
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Probability of investing
0.5 0.4 0.3 0.2 0.1
Male Female
0 1
2
3
4
5 6 Round
7
8
9
10
FIGURE 2.2. In single-gender sessions, there are no gender differences in the probability of volunteering for the low-rewarded task. Source: Babcock et al. (2017).
ment was run in single-gender sessions, so that participants knew that they w ere grouped only with members of their own sex, men and women were equally likely to volunteer to invest. This is shown by the line graph in figure 2.2, in which the lines for both men and women follow a similar downward trajectory, starting at a probability of just above 0.3 in round one and decreasing to just above 0.2 in round ten. Because the gender gap did not emerge in single-gender groups, the gap in the mixed-gender sessions cannot be driven by gender differences in generosity. Neither can expectations of social sanctions explain the result, since the game is one- shot and anonymous.7 But cultural categories and the social norms embedded in cultural categories can explain the outcomes. One explanation is that men and women expect women to volunteer for the low payoff. The convergence of expectations leads them to coordinate on an outcome that reproduces traditional gender inequality. Another explanation is that women want to conform to gender norms by taking the low-reward task. As Sunstein (1996, 2043) notes in the context of the gender division of domestic work, “[t]he social meaning of a woman’s refusal may be a refusal to engage in her appropriate gender role. . . . [P]revailing norms help constitute inequality.” In summary, the experiment illustrates a situation that likely prevails throughout industry and academia in which gender-equal rules are not sufficient to provide gender equality of opportunity. Cultural m ental models of gender bound the choice sets that women and men believe are available to them.
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Example 2. Narratives of Race as a Weapon of the Southern Elite after the US Civil War If a law is enacted that gives rights to one group at the expense of another group, the latter may not be passive. If it is well organized, it can fight back by transforming cultural representations and putting them to strategic use. The history of racism after the US Civil War provides a harsh example. Until the beginning of the nineteenth century, the institution of slavery was the law of the land in the United States. Most slaves and most slaveholding families were in the South. Slaves provided the agricultural l abor that produced much of the wealth of the Southern economy. In the mid-nineteenth century, the US government sought to prohibit slavery in the territories that had not yet become states. This led some states in the deep South to secede, which provoked the Civil War. After the US government won the war, the thirteenth, fourteenth, and fifteenth amendments to the US Constitution abolished slavery, guaranteed “equal protection u nder the law” to Black people, and gave Black men the right to vote. The economic and political interests of the Southern White elite led them to staunchly oppose the extension of rights. Despite having lost the war, the elite were sufficiently well organized to pursue a strategy that made it very difficult for Black people to exercise their new rights. The Southern elite fostered hatred of Black men with “a ‘daily barrage of Negro atrocity stories,’ [and so] the familiar image of an inferior but not malign Black was replaced by the image of a lustful, violent, aggressive Black who had been guilty of crimes against Whites (and would commit them again, given the chance)” (Glaeser 2005, 67; see also Faust 1981). Glaeser (2005, 68) shows the time series of expressions of anti-Black hatred in the American South: “Hatred was low before the Civil War, rose in the Jim Crow period, and muted after World War I.” The Southern elite represented as simple justice acts of terrorism against Black men who tried to exercise their right to vote, hold office, and work for themselves (Budiansky 2008). We draw on game theory to illustrate in a very s imple way some of the f actors at play after the Civil War. T able 2.2 shows the strategy sets of two actors—the US government and the Southern elite—beside the rows and above the columns. It shows the utility of each player inside the cells (with the US government’s payoff, incorporating the payoff to African Americans, coming first). Each player chooses a strategy to maximize its utility. Whatever the Southern elite’s strategy, the US government’s best choice after the Civil War was to give equal rights to Black men. That reflected the evolution of attitudes in the North during the course of the war and the large contribution that slaves had made in fighting the war. T able 2.2 shows how US policy triggered a change in the strategy of the Southern White elite. Since it could not eliminate the possibility of equal rights, creating
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TABLE 2.2. Game depicting interaction of US government and Southern White elite during Reconstruction SOUTHERN WHITE ELITE
US government during Reconstruction
PROMOTE THE IDEOLOGY OF RACIAL HIERARCHY
PROMOTE HATRED AND DISTRUST OF BLACK PEOPLE
PROMOTE THE IDEOLOGY OF RACIAL EQUALITY
Do not give equal political rights to Blacks and Whites
0, 10
−1, 3
5, 0
Give equal political rights to Blacks and Whites
5, 5
1, 8
10, 2
an ideology of racial hostility based on the representation of Black men as evil and untrustworthy yielded the Southern elite its highest payoff in this game. Comparison of the elite’s payoffs in row 2 shows that promoting hatred of Black people was the elite’s preferred option. The game predicts a change in the stereotypes of Black people, a steep reduction in their payoffs compared to the outcome of equal rights and an ideology of racial equality, and low aggregate utility. Achieving the US goal in Reconstruction of political equality for Black and White people would have required two kinds of intervention: the provision of equal l egal rights and also measures to give racial equality a cognitive foundation that legitimized the equality of rights. A belief that oppression of Black p eople was morally repugnant might have overcome the Southern elite’s economic self-interest. The elite’s ability to incite hatred of Black people can be understood as their ability to change the meaning of race. Even many poor Whites, who would have benefited from an increase in agricultural wages, came to hold racist views. It is often said that the North won the war, but the South won the peace (see Gates 2019). The outcome might have been different if the US government had sustained Reconstruction and provided land and education to the Black population—“40 acres and a mule” was the policy u ntil the assassination of President Lincoln. Education and land would have created new prototypes and new social patterns that might have legitimized the extension of economic and political rights to Black people. Acharya et al. (2016) show the link between economic f actors in the immediate postbellum period and racial ideology today. They show that the ideology of White hatred of Black p eople is strongest in the counties of the US South that
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had been most dependent on slave l abor and thus had the greatest economic and political incentives to reinforce racist norms to maintain control over the former slaves. In the counties that in 1860 had a higher proportion of slaves (and, hence, higher dependence in 1860 on slave labor), White people are today more likely to express racial resentment and oppose affirmative action, compared to White people who live in otherwise similar areas that had lower population shares of slaves. Anti-Black attitudes faded e arlier in areas with a low historical dependence on slave labor, as well as in areas that recovered swiftly, through agricultural mechanization, from the economic shock that accompanied emancipation. Counties with higher historical levels of slave ownership had higher rates of Black lynchings: a 10-percentage point increase in slave ownership is associated with an increase of two lynchings per 100,000 residents. The relationship is causal. Acharya et al. (2016) also show that across the counties of the US South, the suitability of the land for growing cotton predicts current levels of White racial hostility and opposition to affirmative action. To summarize, powerful groups created new m ental models in the postbellum period to incite Whites to block the exercise by Black people of their new rights. Limited efforts w ere made by the US government to change the racist beliefs that prevailed e ither antebellum or postbellum.
Par t II: Four Examples in Which Law Has Transformed Cultural Categories We now show that law can transform cultural categories by making possible new kinds of social interactions and exposing people to new prototypes and role models. The effect can be emancipatory. To put this in context, consider first the expressive function of law. Lawrence Lessig (1995) and Cass Sunstein (1996) showed that by expressing social values, law influences social norms. One way that it does this is by influencing individuals’ beliefs about the actions that o thers approve or disapprove of—that is, the individuals’ second-order expectations. Even a rule whose violation triggers little legal penalty can have a substantial effect on behavior if it affects the normative order. Funk (2007) demonstrates the expressive power of the laws in Swiss cantons that made voting compulsory. Violators were typically fined only about one euro, yet repeal of the laws reduced voter turnout by 6–10 percentage points. The repeal had expressive value. The expressive function of law operates primarily on the external normative order, whereas the schematizing function of law operates on the internal cognitive
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FIGURE 2.3. Three functions of law. (1) Command and coordinating function—To define rights, duties, and prohibitions. (2) Expressive function—To fortify or change social norms, the exterior normative order. (3) Schematizing function—To provide cognitive foundations of institutions and norms, the interior cognitive order.
order. It changes that order by making possible new experiences or exposure to new prototypes or role models. The expressive function is something that the state directly controls, but the schematizing function is indirect; the state does not control what beliefs an individual w ill absorb from new social patterns. Figure 2.3 illustrates the three functions of law. Cultural m ental models, as noted above, can persist indefinitely. The location of pogroms in the fourteenth century during the Black Death predicts anti- Semitism centuries later (Voigtlander and Voth 2012). To illustrate the relationship with one comparison, consider the two small German towns of Konigheim and Wertheim. They are six miles apart and both had Jewish settlements before the Black Death. Konigheim did not witness a pogrom during the plague, but Wertheim did. Six centuries later, in 1928, the Nazi Party received 1.6 percent of votes in Konigheim compared to 8.1 percent in Wertheim. The impact of experience and exposure on m ental models, and of mental models on behavior, creates opportunities for policymakers to use the law and policy to change how groups are perceived and how they perceive themselves. Below we present four examples.
Transforming Gender Representations by Political Reservations for Women Philosop hers once believed that individuals associated necessary and sufficient conditions with a concept: for example, for a square, the conditions would be plane figure, four equal sides, and four equal angles. This is the “classical view” in the philosophy of concepts. In contrast, the modern view in philosophy is that people use prototypes and exemplars to define concepts (Rey 1999: Smith and
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Medin 1999). Kahneman and Tversky (1973) present many kinds of evidence that humans conceptualize in terms of prototypes and exemplars, since they are more accessible than abstract conditions. The Constitution of India of 1950 gave men and w omen equal political rights, but in the following decades, few women ran for political office in local or state government. Far fewer w ere elected. In villages in India, it is commonly observed that “[w]omen are taught from childhood to confine themselves to h ousehold tasks and help men in the f amily occupation” (Dandekar 1986, 68). Villages had few exemplars of local female leaders, with the exception of wives of former village heads who were elected as village heads to permit their husbands to effectively extend their terms in office. A 1993 amendment to the Constitution of India reserved the position of village head (pradhan) for a w oman in a random selection of one-third of the villages in India. Through many measures of the impact in the state of West Bengal, Beaman et al. (2009, 2012) show that the law reduced prejudice against women leaders and led people to see women in new ways. To evaluate prejudice against women leaders, villagers were asked to listen to speeches involving village leaders and to rank them on a scale of effectiveness. The content of the speeches was always the same, but the gender of the speaker was randomized. (This test is an example of the Goldberg paradigm.) The speeches were adapted from actual village meetings. Respondents in the control villages (without reservations for women) ranked female leaders lower than male leaders in the speeches. So did respondents in villages with only five years of exposure to a woman as head of the village council. But after seven years’ exposure, men’s bias against women leaders vanished. A second measure consisted of Implicit Association Tests. These tests ask respondents to categorize a series of terms. Scores depend on accuracy and speed. One test used the following categories: man, woman, leadership activities, and domestic tasks. Sometimes the categories would be grouped in a way congruent with gender stereotypes—
Woman Domestic tasks
Man Leadership activities
and sometimes incongruent: Woman Leadership activities
Man Domestic tasks
An individual would categorize each term into the left or right column on a computer monitor. The difference in accuracy and speed between the tests under the
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stereotype-congruent condition and u nder the stereotype-incongruent condition is a measure of the strength of the stereotype. Exposure to female leaders through reservations weakened the stereotype. That is, it increased the ability of men to associate women with leadership activities. A third measure to evaluate the impact of political reservations for women was villagers’ evaluation of the pradhan of their own villages. For villagers who were exposed for the first time to a woman pradhan, evaluations were less favorable than evaluations by villagers with a male pradhan. But for villagers exposed for the second time to a w omen pradhan, evaluations of the w oman pradhan were no less favorable than evaluations of a male pradhan. This finding is consistent with a change in villagers’ perceptions of women leaders, but does not prove that a change had occurred, since the second-term women could have been more qualified than the first-term women. The strongest evidence that exposure to women pradhans changed cultural categories and removed the barriers to women to exercise their right to hold politi cal office is that in f ree elections following a period of political reservations, w omen were more likely to run for office and female candidates w ere more likely to win. The rational actor model can explain this, but it cannot explain the results of the Implicit Association Test (since for the rational actor, thinking entails no costs). An alternative theory that can explain both sets of results is that individuals think with cultural categories, and exposure to women leaders changed individuals’ cultural understandings of what a good leader and a woman are. People have vivid pictures of what a category of person is like, and the pictures organize their understandings (Swidler 2001, 36 and note 10). The philosopher Georges Rey argues that “what competent users of a concept know are typicalities. . . . The necessary and sufficient conditions of the Classical View simply do not appear to play a role in people’s actual acts of categorization” (Rey 1999, 281). Individuals rely heavily on stereotypical information. Stereotypes tend to exaggerate small differences between groups.8 In India, two rounds of po litical reservations appear to have given villagers sufficient exposure to local women leaders to change the concepts of good leader and woman: it became ordinary to accept that a w oman could be a good leader. Concepts influence preferences. If cultural categories of w omen change, preferences of females and attitudes toward them are also likely to change. Beaman et al. (2012) show that they did. Compared to villages without a politically reserved woman leader, seven years’ exposure to reserved women leaders caused teenage girls to be less likely to want to become housewives, less likely to want their in-laws to determine their occupation, more likely to want to marry after the age of 18, and more likely to want a job that required more education. Similar changes in parents’ aspirations appear to have changed the way that parents
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treated their children. It reduced slightly the gender gap in the amount of time that teenagers spent on h ousework. The changes in behavior and aspirations described here occurred despite the absence of any change in the educational and labor market opportunities for females. Another change made by the 1993 amendment to the Constitution of India was to reserve for women in all villages one-third of the seats of the village council. Dif ferent states of India began applying the law in different years. The introduction of the law over time facilitates identification of the causal impact. Iyer et al. (2012) find a large upward trend in registered crimes against w omen after a state applied the new law, and yet no evidence of an increase in a ctual crimes against women. Evidence from many sources support the conclusion that the increase in registered crimes against w omen was largely due to more women who were victims of crimes being willing to report the crimes to the police, and police officers being more willing to record the crimes. In the long run, the increase in reported crime should provide equal deterrence to crimes against men and w omen through legal action. In summary, the evidence on the impact of political reservations in India for women suggests that it changed village culture. This kind of effect is not automatic. The same constitutional amendment that created political reservations for women in India also created political reservations for Scheduled Castes (the former Untouchables). There is not—at least not yet—any evidence that this affected the cultures of villages. Instead, the evidence so far available shows that the presence of a reserved Scheduled Caste (SC) pradhan spurred high-caste teachers to harass SC students more. Priyanka Pandey (2005) conducted a study in which she visited public schools in North India at random times. In villages with SC- reserved pradhans, she found that high-caste public school teachers stole more of the scholarship money from SC students, w ere more often absent from work, and improved student achievement by less. An interpretation is that the law triggered a backlash in the high caste to try to put SCs in “in their place.” Victoire Girard (2018) studied the impact of five years of SC reservations on discrimination as measured by one question on India’s Rural Economic and Development Survey of 2006: “Have you, or any member of your f amily, been prevented from entering any street within the village b ecause of your caste now?” In 2006, 45 percent of SC h ouseholds said yes. The survey results show that during the tenure of SC village leaders, SC reservations reduced caste-based discrimination against SCs by 10 percentage points, but that the effect did not persist after the SC reservation ended. SCs are deeply stigmatized. For many centuries and even in many villages today, the isolation between SCs and upper castes is extreme. We have argued that starting from a stable social equilibrium, two kinds of measures (a one-two punch) may be needed for law to bring about social
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change—a change in incentives and a change in cultural mental models. Unfortunately, there is no assurance that a second punch—providing new exemplars of a cultural category—will transform it.
Reducing Discrimination by a Legal Ruling That Desegregated Some Elite Schools by Income Class If a law increases engaging experiences with an out-group, it may reduce the limited understanding of the out-group that often drives discrimination (Allport et al. 1954; Pettigrew and Tropp 2006; see Enos 2014 for a different finding). Gautam Rao (2019) shows that interactions in a context of cooperation between rich and poor students in New Delhi private schools, beginning at age four, reduced rich students’ discrimination against poor children and also made the rich students more generous.9 The Delhi government leases land to many private schools in perpetuity at highly subsidized rates. In exchange, the law mandates that the schools serve “weaker sections” of society. The law was not enforced until a Delhi High Court ordered almost 400 private schools to reserve one-fifth of their seats for students from poor households (with partial compensation provided by the state). The decision required the schools to admit a random selection of applicants from poor households. It also required the schools to integrate the scholarship students into the classes of the non-scholarship students. As a result, beginning in 2007, rich students (typically from above the ninety-fifth percentile of the consumption distribution in Delhi) shared classes with students who w ere on average at the twenty-fifth percentile of the distribution. In Delhi, most children enter school at age four and remain in the same school through the higher grades. The court order applied only to new admissions of children. Beginning in e ither 2007 or 2008, cohorts of students in the affected elite private schools w ere made up of 20 percent poor students. By using controls for fixed differences among the schools to which the court order applied, Rao identifies the impact of desegregation (the “treatment”). To study discrimination, Rao created a relay race with prize money. Before the experiment began, students watched each child run a series of one-on-one sprints, which revealed how fast all the children could run. Then the subjects who were not g oing to run themselves (we will call them “team leaders”) chose the runners whom they wanted on their team. Among children whom they could recruit, if a poor child was a faster runner than a wealthy child, the leader faced a trade-off: If the leader chose the fast but poor child, the likelihood of winning the relay prize increased, but she might have less fun interacting with the poor child. If she chose
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the slow wealthy child, the likelihood of winning the prize declined, but she might have more fun interacting socially with someone who was in an income class similar to her own. The treatment reduced discrimination. Exposure to poor students at school reduced by half the proportion of wealthy students who discriminated against poor c hildren. Among wealthy students without poor classmates, 23 percent discriminated against poor children: they selected a wealthy teammate, even though a poor child had been faster in the sprint. Wealthy students with poor classmates discriminated less than t hose without poor classmates, and the effects w ere strongest for participants in the lowest-stakes race. Rao also used a series of activities and games to compare the generosity of treated and untreated students. Students w ere invited to participate in weekend activities at the school to help fundraise for a charity serving disadvantaged children. Treated students were 10 percent more likely to volunteer than nontreated students. Rao also had the children play dictator games (the standard game, discussed above, to measure generosity toward anonymous others). Treated students shared 45 percent more of their endowment than did nontreated students. Rao was able to pin down the mechanism that drove the changes in behavior. The schools form “study groups” of two to four students to work cooperatively to solve problems in math, reading, and crafts. In some schools, the groups are formed by clustering names that appear together in the alphabetical list of a class; that is, Aarav would be grouped with Aditay and Arjun. This makes the grouping of a rich child with a poor child a quasi-natural experiment; it depends on the accident of how closely their names appear on the alphabetically ordered list.10 For schools that use this alphabetical method to form student groups, Rao contrasted the behavior of the treated rich students whose names are adjacent to only rich students’ names with rich students whose names are adjacent to poor students’ names. Figure 2.4 compares the level of discrimination of wealthy students with and without a name adjacent to poor students’ names. The figure shows that it was the close interaction provided by being in a study group with a poor student that caused the large change in discrimination. Wealthy students in study groups made up of only wealthy students were more than twice as likely to discriminate as wealthy students in study groups with poor students.
The Sustained Effects on Investment in Children and on Aspirations of a Short-Term Transfer Program Living in poverty affects the qualities that a person is assumed to have; and the experience of poverty affects how p eople perceive themselves (Fell and Hewstone 2015). The stereotype held by many Americans that the poor are low in compe-
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FIGURE 2.4. Interaction of wealthy students with poor students in study groups reduces discrimination against the poor. Source: Rao (2019).
tence and warmth (Fiske et al. 2002) can lead people to treat them with contempt (Cuddy et al. 2007). The “self-schemas” of the poor can make them feel stigma and shame about their place in the world. In a global survey of p eople living in poverty, respondents emphasized the humiliations: One deeply felt deprivation is not being able to do what is customary in the society . . . not being able to entertain visitors or enjoy social life . . . shame from not having toilets for visitors, or money to buy a coffin for burying a relative. . . . Appearances and clothes . . . are mentioned as important for self-respect and, conversely, they can be an important source of shame. In Etropole, Bulgaria, “people who cannot afford warm clothes for the winter go to work. Then they come back and stay at home under a pile of blankets, shivering with cold. They don’t go out. They are ashamed to meet other people. If they run into a friend and are invited for a drink, they must refuse. So they would rather not go out at all.” (Narayan et al. 2000, 38–39) Shame is associated with depleted self-efficacy (Baldwin et al. 2006). The psychological dimensions of poverty make it more challenging for the poor to improve their lot. Exposure to high-achieving role models can sometimes help people develop self-efficacy (Bandura 1997) and increase their productivity (Henrich and
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Broesch 2011). But poverty tends to put such role models out of reach: Residential neighborhoods and social networks are often income-segregated. As a result, people living in poverty may be guided to naturalize the situation they are in (Appadurai 2004; Ray 2006; Duflo 2012; Macours and Vakis 2014; Tanguy et al. 2014; Dalton et al. 2016). Aspirations are conceptualized as both a preference and a capacity (Appadurai 2004; Duflo 2012). Aspirations depend on the social reference points that influence individuals’ expectations (Dalton et al. 2016).11 Vicariously experiencing upward mobility of social referents who are “mentally close” because of social interactions raises the capacity to aspire. Inequality that is so high that society is polarized by class—most people are either poor or well-off, and few are middle income—reduces the access of the poor to networks with slightly better-off peers. This can lower the aspirations of the poor and the effort they make to escape poverty, which can entrench the unequal income distribution (Genicot and Ray 2017). A conditional cash transfer program (CCT) in Nicaragua reduced aspiration failure by bringing poor individuals into regular contact with upwardly mobile peers. In 2006, the Ministry of the F amily in the government of Nicaragua implemented a one-year CCT to help poor people cope with financial strain and to promote upward mobility. It targeted six municipalities in a region that was plagued by drought. By lottery, it divided the 106 communities in the municipalities into a treatment and a control group (fifty-six treatment, fifty control). All poor households in the treatment communities were eligible to receive the cash transfer. To identify poor households, the government conducted a means test. Ninety p ercent of all h ouseholds (about three thousand h ouseholds) were eligible. The cash transfer was conditional on parents’ investing in their children in three ways: (1) maintaining children’s primary school attendance, (2) bringing children to health serv ices, and (3) participating in local events on such topics as nutrition practices and job skills. Follow-up data were collected after nine months of program implementation and again two years after it had ended.12 In the treatment communities, the government held a public assembly to explain the logistics of the program. If there were more than thirty eligible households in a community, multiple assemblies were arranged. During the assemblies, women were asked to volunteer for the position of promotora—a leader role designed to improve information and compliance with the program. Volunteers to be promotora had to be approved by the assembly. Each promotora was assigned a group of roughly ten beneficiaries living close to her. At the end of each assembly, all the beneficiaries—including the promotoras—participated in a second lottery to determine who would get, in addition, a $200 lump-sum grant, provided that the individual wrote a business plan and invested the $200 in her own business (Macours et al. 2012).13 The authors compared the pure control (the fifty con-
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trol communities), the individuals who received the cash transfers but did not receive the productive investment grant, and the individuals who received the productive investment grant as well as the cash transfers. The design of the study also enabled the researchers to experimentally assess second-order effects of the packages that the promotoras received (that is, the effect of the promotora’s treatment status on the non-promotora beneficiaries).14 Just like the regular beneficiaries, the promotoras had a one-third chance of receiving the investment grant. B ecause a typical assembly had four leaders, the variation was substantial across assemblies in the share of leaders that received the largest package. (This was not the case for nonleaders, where approximately a third of the beneficiaries in all assemblies got the largest package.) Understanding the second-order effects of the leaders’ benefit packages is important, because the promotoras played a central role in the program. Interviews conducted during and after the program found that the promotoras took ownership of the goals and messages of the project, and they encouraged the other beneficiaries to invest in their children’s nutrition and education. Leaders had on average five years of education; beneficiaries had only three. For the leaders who received the productive investment grant, the higher education levels were likely to help them manage their new, nonagricultural activities. The impact evaluation of the program two years a fter it had ended gives evidence that the promotoras served not only as communicators during the one-year program but also as powerful role models for the other beneficiaries a fter it had ended (see t able 2.3). Households exposed to the promotoras who received the investment grant invested more in their c hildren and had higher expectations and aspirations for their children. In assemblies where all promotoras had received the investment grant, school expenditures increased by 49 percent, and school absences declined by 21 percent. Beneficiaries with one additional leader in their assembly who had received the investment grant had 0.4 days fewer school absences per month by their children, and 16 percent higher expenditures on their children’s schooling. Considering the effect on school investment, the two-year impacts of interacting with leaders who had received the investment grant are the same as, or larger than, the impacts during the program implementation (Macours and Vakis 2016). Why were the effects of the CCT persistent? Two years a fter the program ended, the former program participants were getting no financial support from the program, and it is likely that any special knowledge of the promotoras would already have been passed on to the group members. The authors provide evidence that the leaders shifted the m ental models of the program beneficiaries: Exposure to leaders with the $200 investment grant raised parents’ expectations that their children would move into a professional or skilled salary job. One additional such leader
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TABLE 2.3. Estimated social interaction effects on human capital investments and aspirations 2 years after the Nicaragua CCT program ended BENEFICIARIES INTENT-TO-TREAT INTERACTED WITH PERCENTAGE OF PROMOTORAS WITH THE INVESTMENT GRANT
CONTROL
INTENT- TO-TREAT EFFECT
Percent attending school (7–18-year-olds)
0.777
−0.008
0.045
Number of days absent from school (7–18-year-olds)
6.341
0.197
−1.506*
HUMAN CAPITAL INVESTMENTS
School expenditures (7–18-year-olds) Share of food expenditures for vegetables and fruit
493.4 0.0581
−68.8 0.001
310.9*** 0.022***
ASPIRATIONS AND EXPECTATIONS
Desired years of education
13.29
−0.09
0.946**
Expected years of education
8.41
−0.132
0.805
Desired professional occupation
0.5
−0.015
0.115*
Expected professional occupation
0.023
0.002
0.035**
Note: This table is based on intent-to-treat estimators from tables 2 and 6 of Macours and Vakis (2016). The share of leaders measures the share of female leaders with the productive investment package over all female leaders in a beneficiary’s registration assembly. The data for school attendance and school expenditures are individual-level data for all c hildren of age 7–18 years in a household. The data for desired and expected occupation indicate the share of mothers who desired or expected a professional job for their child, i.e., a job for which university education was required. The data for food expenditures are household-level data. Excluded from the data are h ouseholds with female leaders. Highest and lowest 0.5 percent of outliers in expenditures are trimmed. *** p 0 and λi = 0 for every i ≠ 1. In the latter case, utilitarianism simply reduces to dictatorship. However, the Maximin criterion (4) fails to fulfil B1 and B2. I conclude this chapter with two examples. Example 1.12 Take N = 2, and adopt the injection ι provided by B1. Let g: R → ! be any continuous, strictly increasing function with the property that g(t) = t for t ≤ 0. Define the global utility function Wg : L → R by: Wg ((p1 , p2 ); ((x1 , y1 ), (x 2 , y 2 ))) := p1g (−e x1 + y1 ) + p2g (y2 ), for any simple lottery in L involving the two allocations (x1, y1) and (x2, y2). (By the same argument as in the proof of our Theorem, it suffices to consider such simple lotteries.) The restriction of Wg on R does not depend on g, since g(t) = t for t ≤ 0, and y1 = y2 = 0 on R. The social preferences induced by Wg on S do not depend on g because g is strictly increasing. However, the ethical preferences induced by Wg on ε do depend on g: The weight given to inequality between citizens depends on g. Hence, ethical preferences cannot be deduced from risk and social choice preferences, so that the Proposition above fails. This is due to the failure of B3: Preferences induced by Wg on S are not self-regarding. By contrast, an easy manipulation shows that Wg fulfils A1 (while A0 is obvious): Whatever (x1, y1) and (x2, y2), it is always possible to find (x, y) ∈! 2 such that
Why Economics Is a Moral Science
{ −ex = −e+ y =+−ey x
x2
x1
179
+ y1
2
and to take z + = z − = (x1, y1) while σ +z + = σ −z − = (x2, y2).
Thus, from ethical preferences of the form We ((p1, p2); ((x, y), (y, x)) := p1g(e x + y) + p2g(ey + x), it is possible to reconstruct global preferences, Wg, from which both social choice and risk preferences are deduced. Example 2. Suppose, as in Kariv and Zame (2008), that R can be restricted to nonnegative prizes, that is, R = {(ph ; xh )h | xh ≥ 0 ∀h}. Again, take N = 2. Let f: R → ! be continuous and strictly increasing, with the property that f(t) = t when t ≥ 0. Define the global utility function Uf,λ: L → ! as follows. For every lottery L = ((p1, p2); ((x1, y1), (x2, y2))),
(
)
Uf , λ (L) := p1 f (x1 − y1 ) + p2λ f min | xi − yi | − min | xi − yi | , i =1,2 i =1,2 for a given parameter λ ∈ (0, 1). The risk preferences induced by Uf,λ on R do not depend on f (as f(t) = t for t ≥ 0), nor do social choice preferences (because f(0) = 0, so that, for every allocation (x1, y1), Uf,λ(x1, y1) = f(x1, y1), and f is strictly increasing). However, the ethical preferences induced by Uf,λ on ε do depend on f, again because the weight given to inequality depends on f. Thus, once again, the Proposition above fails, so that ethical preferences cannot be deduced from risk and social choice preferences. This time, it is B2 that is v iolated: There is no worst outcome. At variance with Example 1, however, Uf,λ does not verify our convertibility assumption A1 either, so that our Theorem fails as well. Indeed, for every allocation, z = (x, y), Uf,λ((p, 1 − p); (z, σ z)) = pf(x − y), what ever the probability p ∈ (0,1]. Hence, ethical preferences do not depend on λ, while global preferences do. And since risk preferences depend on λ as well, they cannot be deduced from ethical ones e ither.
Notes Centre d’Economie de la Sorbonne, University Paris-1 Panthéon-Sorbonne, gael.giraud@ univ-paris1.fr. Support from the Energy and Prosperity Chair is gratefully acknowledged. 1. Another example is Binmore (1994, 1998). 2. Following Ricœur’s (1992, 170) classical distinction between ethics as the aim of an accomplished life in a teleological perspective, and morality as the set of norms related to a deontological point of view, I prefer here the term “ethical” to “moral.”
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3. Notice that I nowhere require preferences to be increasing with respect to prospects. 4. That is, ph ≥ 0, for each h, and Ph ph = 1. 5. We could enlarge the ethical choice environment to include lotteries with random assignment without changing the analysis. 6. Zame et al. (2019) perform this deduction by considering an abstract (finite) set Ω of social states, a subset P ⊂ Ω of which have consequences only for the Representative. 7. Notice that we do not require global preferences to be complete or reflexive. 8. Remember the definition of compound lotteries: Suppose that L1, . . . , Lk are k lotteries, and (ph)h =1, . . . ,k is a probability distribution. Then (ph; Lh)h denotes a compound lottery in the following sense: One and only one lottery w ill be the prize, and the probability that it w ill be Lh is ph. 9. A stronger requirement would require, e.g., that (z +, σ +) and (z −, σ −) coincide with some (z, σ) such that z ∼ x and σz ∼ y. This property, however, would not be fulfilled by the Maximin criterion. Weak convertibility is also implied by (but does not imply) the Selfishness property quoted above. 10. So that the restriction A1 on social preferences actually can be viewed as a constraint put on ethical preferences. 11. See Luce and Raiffa (1957, 28). 12. This is a variant of Example 2 in Kariv and Zame (2008).
References Artzner, P., F. Delbaen, J.-M. Eber, and D. Heath. 1999. “Coherent Measures of Risk.” Mathematical Finance 9(3): 203–228. Atkinson, A. B. 2009. “Economics as a Moral Science.” Economica 76: 791–804. Binmore, K. 1994. Game Theory and the Social Contract. Vol. 1, Playing Fair. Cambridge, MA: MIT Press. Binmore, K. 1998. Game Theory and the Social Contract. Vol. 2, Just Playing. Cambridge, MA: MIT Press. Fleurbaey, M., and F. Maniquet. 2008. “Fair Social Orderings.” Economic Theory 34: 25–45. Giraud, G. 2021. Composer un Monde en commun: théologie politique de l’Anthropocène. Paris: Seuil, forthcoming. Harsanyi, J. 1953. “Cardinal Utility in Welfare Economics and in the Theory of Risk- Taking.” Journal of Political Economy 61: 434–435. Harsanyi, J. 1955. “Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility.” Journal of Political Economy 63: 309–321. Harsanyi, J. 1975. “Can the Maximin Principle Serve as a Basis for Morality? A Critique of John Rawls’ Theory.” American Political Science Review 69: 594–606. Harsanyi, J. 1977. “Nonlinear Social Welfare Function: A Rejoinder to Professor Sen.” In R. Butts and J. Hintikka (eds.), Foundational Problems in the Special Sciences. Boston: D. Reidel Publishing Company, 293–296. Hayek, F. 1976. Law, Legislation, and Liberty. Vol. 2, The Mirage of Social Justice. Chicago: University of Chicago Press. Hörisch, H. 2007. “Is the Veil of Ignorance only a Concept about Risk? An Experiment.” Discussion paper, University of Munich. Kariv, S., and W. Zame. 2008. “Piercing the Veil of Ignorance.” Working paper 2009-06, University of California, Berkeley. Lhuillier, H., G. Giraud, and C. Renouard. 2017. “Crisis and Relief in the Niger Delta (2012–2013). Assessment of the Impact of a Flood on Relational Capabilities.” Oxford Development Studies 46(1): 113–131.
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Llavador, H., J. Roemer, and J. Silvestre. 2010. “Intergenerational Justice When F uture Worlds Are Uncertain.” Journal of Mathematical Economics 46: 728–761. Luce, R.D. and Raiffa, H. 1957. Games and Decisions. New York, Wiley. Mertens, J.-F., and A. Dhillon. 1999. “Relative Utilitarianism.” Econometrica 3: 471–498. Nussbaum, M. 2006. Frontiers of Justice. Cambridge, MA: Harvard University Press. Rawls, J. 1971. A Theory of Justice. Cambridge, MA: Harvard University Press. Ricœur, P. 1992. Oneself as One Another. K. Blamey (trans.). Chicago: University of Chicago Press. Sen, A. K. 1976. “Welfare Inequalities and Rawlsian Axiomatics.” Theory and Decision 7: 243–262. Sen, A. K. 1977. “Non-linear Social Welfare Functions: A Reply to Professor Harsanyi.” In R. Butts and J. Hintikka (eds), Foundational Problems in Special Sciences. Boston: D. Reidel Publishing Company, 297–302. Sen, A. K. 1986. “Social Choice Theory.” In The Handbook of Mathematical Economics, vol. 3, K. Arrow and M. Intrilligator (eds). North-Holland, Elsevier, 1073–1181. Weber, M. 1988. “Die Objektivität’ sozialwissenschaftlicher und sozialpolitischer Erkenntnis.” In Johannes Winckelmann (ed.), Gesammelte Aufsätze zur Wissenschaftslehre. Tübingen: J.C.B. Mohr. Zame, W. R., B. Tungodden, E. Ø. Sørensen, S. Kariv, and A. W. Cappelen. 2019. “Linking Social and Personal Preferences: Theory and Experiment.” mimeo.
9 EXCHANGE CONFIGURATIONS AND THE L EGAL FRAMEWORK Peter A. Cornelisse and Erik Thorbecke
Exchange is a fundamental part of economic behavior. And yet, remarkably little attention has been given in the economics literature to analyses of processes of exchange. Only in the past few decades have two strands of the literature (game theory and transaction cost theory) contributed significantly to a better understanding of these processes. Game theory has helped clarify the effects of information asymmetries and differences in bargaining power among actors in various forms of exchange. Transaction cost theory explains why economic actors bring transactions under different “governance structures,” such as markets, firms, and families. In this chapter, we propose a new paradigm, the exchange configuration approach, which allows a detailed analysis of various forms of exchange in different settings and at different levels of aggregation or disaggregation in developing and developed countries alike. This approach aims to identify the very building blocks of transactions and to explain how transactions obtain their form and content. In doing so, we frequently draw on our recent book, Exchange and Development (Cornelisse and Thorbecke 2010), and an abbreviated version of it (Thorbecke and Cornelisse 2014). It should be emphasized that one of these building blocks and key determinants affecting the form and content of transactions is the prevailing l egal framework, which can vary enormously across different settings. In section 1, we discuss some alternative approaches to the exchange process. Next, we present in section 2 our exchange configuration approach before focusing more specifically on the relation between market failures and the legal framework in section 3. The 182
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chapter concludes by giving an example of an exchange configuration and the multiple types of transactions and legal contracts that might ensue.
1. Alternative Approaches to the Exchange Proc ess In spite of the centrality of exchange to the operation and performance of any given economy, it is not easy to find a conceptual framework in which to study exchange that reflects and explains the enormous diversity of transactions that take place in the real world. Exchange that takes place in formal markets is best studied in the economics literature, yet even such a basic concept as “market” lacks a widely accepted definition.1 Moreover, insufficient attention is generally paid to transactions that take place outside of formal markets. In developing countries, in particular, many forms of nonmarket exchange relations are both socially and economically important. Different approaches to modeling the exchange process are available in the literature, some more general and some more specifically directed to modeling developing countries. Neoclassical models of markets predominate. The assumptions in these models regarding exchange are familiar: Property rights are fully determined, all actors are perfectly informed, and their capacity to process this information is unlimited. Therefore, transaction costs are excluded in neoclassical models. By assumption, only production costs are covered. In reality, transaction costs represent the aggregation of a number of costs that are generally not included in the concept of production costs, such as information costs, negotiation costs, monitoring costs, coordination costs, and enforcement costs. These costs—many of which are directly or indirectly related to the prevailing legal framework—are significant, and they have a strong impact on economic behav ior. The main contribution of the New Institutional Economics (NIE) has been to incorporate transaction costs as a major determinant of the exchange process. NIE explicitly recognizes the fact that information is imperfect and that economic actors are “intendedly rational, but only limitedly so” (Simon 1957, xxiv). So transaction costs cannot be avoided. North (1987) argues that the addition of transaction cost analysis to the standard economic approach makes it a useful tool for analyzing the whole range of allocation systems in history (Eggertson 1991). Polanyi’s various “transaction modes”—administered trade, reciprocal obligatory gift giving between kin and friends, and householding, for instance—are not purely social and psychological institutions, according to North. Polanyi’s transaction modes are in fact alternatives to price-making markets and are used instead of markets to allocate
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resources, because they economize on costs—particularly transaction costs—in the particular environments where they are found. But it is mostly Williamson, who, in a series of publications, developed a coherent theory of Transaction Cost Economics. He identified three characteristics of transactions, each having a specific impact on transaction costs, which determine the preferred transactional mode (the so-called governance structure, such as markets, families, and firms). T hese characteristics are uncertainty, asset specificity, and frequency. He also introduced the concept of opportunistic behavior (i.e., self- interest seeking with guile), which seriously enhances uncertainty. Such behavior follows logically when it is recognized that economic actors are imperfectly informed and can, therefore, be deceived. Economic actors thus have strong incentives to select for their intended transactions the particular transactional mode that helps reduce their transaction costs (Williamson 1975, 1985, 1996, 2000).
2. The Exchange Configuration Approach Transaction Cost Economics can account for the existence of broad categories of forms of exchange, but it does not explain the immense variety of forms and content of economic transactions within these categories. Hence it is desirable and necessary to develop a more general framework in which one can organize, analyze, and evaluate the myriad existing exchange settings but which still remains manageable. Such a general framework would not only have analytical merit; it could also contribute to improved policymaking. By laying bare the foundations of transactions, it would allow a more precise identification of characteristics that cause desirable and undesirable results. The approach presented here traces exchange relations back to their building blocks—that is, to the specific combination of characteristics that jointly shape the form and content of a given exchange.2 We call these building blocks elements of exchange. These are: 1. the item exchanged; 2. the actors engaged in decisions related to the item being exchanged; and 3. the environment—physical, social, technological, legal,3 and so forth—in which the actors operate. We postulate that the characteristics of these elements, in different combinations, shape distinct types of exchange relations and help explain their content and operation. We term each particular combination of elements together with the formation process of the exchange considered an exchange configuration (see figure 9.1).
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Each of the three elements of an exchange configuration must be further broken down into an array of characteristics. The item at the heart of a transaction can be a product (e.g., a consumer good, an intermediate input, and a capital good, a serv ice, a residential or nonresidential building, a financial asset, land, or foreign exchange). Differences in the nature of t hese items strongly influence the corresponding transactions.4 It can easily be seen, for example, why a transaction involving an ocean liner differs from one where a b ottle of beer changes hands. The power of discrimination of the item traded is also illustrated by the fact that markets are generally distinguished and named according to the items traded within these markets. Attributes of actors consist of their preferences and objectives and other characteristics, on one hand, and the instruments available to them in pursuing their objectives, on the other. Such instruments include income, wealth, skills, education, social position, and information. There are many groups of actors. Producers, consumers, traders, and investors are examples of market actors; a branch manager of a vertically integrated firm and members of a farm household, operating within a firm and a family, respectively, are examples of nonmarket actors. The environment is the third element of an exchange configuration. Characteristics of the environment impose various kinds of constraints on actors’ decisions and their choice of transactions. For example, property rights, laws, and regulations have direct and indirect influences on actions culminating in transactions—as discussed in section 3. Other examples are behavioral and cultural codes inspired by the norms and values generally accepted in a given society; restrictions relating to the physical environment, encompassing among others, location, soil, and climate characteristics as well as the underlying infrastructure. T hese characteristics determine the type of goods that can be produced (e.g., what crops are suited for production in a given agro-ecological setting), transported, and marketed. Further, the overall level of economic development of a region or country acts as a constraint on purchasing power and on the volume exchanged, which in turn, affect the degree of specialization that a market can support. Finally, the available technological shelf acts as a bound on the feasible range of market decisions. Thus, as defined h ere, the environment includes political and legal, cultural, physical-geographical, technological, and organizational dimensions, as well as the underlying socioeconomic structure. Having come to this point in the presentation of our analytical framework, we have to confront and address a potential problem. The problem relates to the total number of characteristics of the three exchange elements that might conceivably be relevant as building blocks for all transactions one can imagine. A complete list of these characteristics must be almost endless. So the question is: Can the concept of exchange configurations be of any use, if it is based on myriads of potentially
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relevant data and variables? The answer, fortunately, is relatively simple. For it appears that in any analysis of specific transactions (individual or aggregated, and whatever the type), only a few elements from the universe of potential features dominate the formation process and have discriminative power (in the sense that they are highly intercorrelated with other features). It also appears that these relevant and discriminating features suggest themselves fairly easily when considering the transaction being studied. Experience shows that, for each transaction or group of transactions, a reasonably small number of properties (a dozen, at most) can effectively describe the key features of the item traded, the participating actors, and the environment in which the transaction takes place. Or, turning the argument around, a given subset of properties of elements can be used to explain the form and content of an exchange that embody the terms of exchange, the a ctual transfer of the item traded, and payment or settlement according to the agreed terms. The argument applies to market as well as nonmarket transactions in developing and developed countries alike. Figure 9.1 shows graphically and in general terms the logic underlying the exchange configuration concept.5 The relevant characteristics of the three exchange elements that have been identified for the transaction(s) u nder consideration appear at the bottom of the figure (a few of which are represented as dots in the ovals). In the formation process from a specific combination of characteristics to the resulting transaction(s), the actors play a crucial role as they activate the transaction(s). In other words, actors, as one of the elements of exchange, differ fundamentally from the item exchanged and the transactional environment, the other two ele ments. Actors consider, create, decide, and execute. They use their knowledge and experience of other transactions, take account of the prevailing properties of exchange elements, consider the terms of a possible transaction, and adjust them when possible in negotiations with their counterparts. Only when they make a positive decision does the transaction become a fact; and it is left to the actors to execute the agreed-on transaction. Note that it is the actors who convert the exchange ele ments into transactions. An entire constellation—composed of a combination of the characteristics of elements, the shaping of ensuing transactions, and the resulting set of homogeneous transactions—is what we call h ere an exchange configuration. Exchange configurations can be thought of as channels through which specific transactions are effectuated. Given the constraints they face and their own attributes, the properties of the item transacted, and their environment, actors will choose to operate in (or will invent or initiate) the configuration and corresponding transaction that minimizes the sum of production and (perceived) transaction costs.
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FIGURE 9.1. A simple version of an exchange configuration. Source: Cornelisse and Thorbecke (2010, 27).
3. The Use of L egal Meas ures to Address Market Failures The fundamental importance of the legal framework on the ultimate form and nature of the transactions generated in a given exchange configuration should be obvious to any researcher. Students of comparative law know very well that different legal systems can yield very different transactional outcomes. In turn, the noncompliance with, or the absence of, a legal system is more than likely to lead to a failed state. In what follows, we give a few examples of how the state can intervene through legal means to influence and, ultimately, shape transactions with the objective of addressing market failures.
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Market transactions are a particular and, in many respects, refined type of economic exchange. Elsewhere we have defined these transactions as bargaining transactions with full quid pro quo occurring frequently with a spillover of information.6 Such an exchange can come about only after a long period of disciplining to promote trust and cooperation and to reduce uncertainty. In other words, it is inconceivable that market transactions can evolve and flourish without a set of legal arrangements relating to property rights and commercial law and without an authority to devise such arrangements and enforce compliance. The importance of these basic conditions can hardly be overestimated in a world where nearly all economies are guided by the market principle. But there is more action on the interface connecting economic exchange with legal systems and state intervention. The reason is that markets often fail even under the best of conditions, and that they do so in different ways. Public sector intervention7 is often needed to improve market performance and even to replace markets altogether, a subject that is less well known than the one mentioned above. In this section, we discuss briefly some major forms of market failure, and the (sometimes even imperative) policies that they have generated. It w ill appear, not surprisingly, that all market failures can be traced back to specific aspects of the three exchange elements discussed in section 2.
3.1. Public Goods Public goods are characterized by two properties that separate them from other goods. One property is called nonrivalry. It applies when consumption by one user does not impede consumption of the same good by other users. This is an uncommon phenomenon, as consumers of most products are one another’s rivals for that product: the ice cream I eat cannot also be consumed by somebody else (or perhaps only by my little d aughter). But consider a street light. Its light helps me find my way as well as all other passers-by. The other property is nonexcludability, which refers to the fact that the provider of a good cannot exclude consumers from using that good. This property is also an unusual one, as most products are typically excludable: If I do not pay for my ice cream, the vendor will not sell it to me. The provider of a city street, in contrast, cannot stop all users of the street to demand due payment. As pure public goods are both nonexcludable and nonrival, markets cannot (will not) provide them efficiently. Nonexcludability implies that suppliers cannot collect revenues to compensate for the costs incurred, so market actors opt out. In the case of nonrivalry, the marginal costs of using the good are zero, as the use by any additional consumer involves no extra costs. So any positive price
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that is charged is arbitrary and does not reflect the marginal costs, an inefficient outcome. There are only few pure public goods, but their provision is very costly. One example is a national defense system. It is clearly nonrival, as it covers an entire nation, and the protection it provides to one citizen does not diminish the protection for o thers. It is also nonexcludable, as it is practically impossible to limit protection to those willing to pay for it. Other examples are roads and bridges and infrastructures protecting against flooding. Note further that pure public goods come in one size only. Individual preferences cannot be taken into account, and hence, dissatisfaction among users is inherent. It follows from this discussion that public goods belong to the realm of the public sector, which must not only decide how much of them is provided but which must also finance the costs of investment and maintenance. Different levels of government occupy themselves with these tasks, depending on the reach, or geographic al span, of the public goods concerned. For example, local governments w ill take care of public gardens, while the larger parks are, generally speaking, the responsibility of provincial governments. Because public goods are meant to serve the general public, it is only natural that they are financed by taxes. So public goods are directly connected to the vast range of rules that regulate the collection of general taxes. But other complex types of policies are also involved, such as expropriation procedures for infrastructure projects overriding private property rights. Further, because of the vast sums involved and the ever-present danger of corruption, public tenders need to comply with intricate and elaborate procedures that are meant to discriminate objectively among potential suppliers.
3.2. External Benefits and Costs In some cases, the private production or consumption by one actor or group of actors has a positive or negative impact on the well-being of other actors. For example, inoculation against a specific disease protects not only the recipient but also other p eople, including those who cannot be inoculated b ecause of an intolerance. This is a case of an external benefit or positive externality. The costs of the inoculation do not take account of this beneficial effect and are therefore higher than they should be. It may be a reason for a government to subsidize the inoculation or even to make it compulsory if the subsidy is not sufficiently effective. External costs or negative externalities are the counterpart of external benefits. In terms of the number and monetary impact of governmental countermeasures, they are much more spectacular. The most familiar example
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relates to the air, w ater, and soil pollution resulting from production of a variety of products with harmful health effects for the neighboring population and for the vitality of the environment in general. Governments may decide to tax such production activities and thus to internalize the external costs. Alternatively, considering that lives are at stake, such damaging activities may be prohibited entirely.
3.3. Uneven Market Power Markets tend to fail when they are dominated by one or only a few actors on the supply or demand side, as in monopolies and monopsonies. The benefits from transactions in such markets are likely to be distributed very unevenly, such that there may even be outright exploitation. Furthermore, dominating-actor groups have little incentive to improve their own performance; on the contrary, their natural objective is to maintain the status quo. Governments have an array of mea sures at their disposal to combat uneven market power and promote competition, of which we mention only a few, such as laws against cartels and collusion, and measures to strengthen the position of the weaker actor groups or to prohibit intended mergers.
3.4. Income Redistribution The income distribution generated by markets that are left unconstrained may be considered undesirable and at the limit, even unacceptable for a variety of reasons, among which moral judgments figure prominently. Governments may address this problem in different ways at three different levels: the primary, secondary, and tertiary level of personal income distribution. The primary level is concerned with the personal distribution of income obtained from production activities, such as wages, profits, and interest payments. This distribution tends to be typically very skewed, but it can be made less uneven, for example, by introducing minimum wage levels. The remaining unevenness can be reduced further through progressive income taxes and social security benefits. The resulting distribution is called the “secondary income distribution.” In many countries, still further redistribution is achieved by means of income-dependent subsidies on consumption of certain products. Examples of such products are education, housing, and health care. The accumulated effect is reflected in the tertiary level of income distribution. The size and complexity of the administrative burden entailed by all these measures taken together are particularly impressive.
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3.5. Goods and “Bads” here are markets that function well in the limited technical sense but that still T invite state intervention, because they deal with undesirable goods (sometimes called “bads”). In the estimation of society as a whole, consumers, if left to themselves own, tend to use much more of these bads than they should. Governments have a wide array of measures at their disposal to discourage consumption, ranging from relatively mild information programs (for example, about health hazards), excise taxes (as on tobacco and alcoholic drinks) to outright prohibition. Violation of the prohibition measures is a continuous threat, so government involvement does not stop h ere. It must be added that there also exist goods that are considered to be undervalued by individual consumers, so that their use deserves to be promoted. Government measures applied here are the inverse of those mentioned above. Examples in this case are subsidies on opera performances and museums and the obligatory use of safety belts and crash helmets. We see the public sector operating h ere in a paternalistic role. A special case illustrating the powerful effect that culture in general and religion in particular can have on the social desirability of a product (and thereby on economic exchange) derives from the prohibition of interest on credit in Islamic countries. Especially since the 1970s, alternative financial instruments have been developed that are consistent with the principles of Islamic law. In practice, however, market actors prefer to remain as close as possible to traditional financial forms.
3.6. Second-Order Market Failure Different countries respond in different ways to the challenges that market failures present. These variations may be the result of differences in judgment regarding the seriousness of the situation or regarding the most effective measures that need to be taken, or the range of measures available. So over the course of time, a complex mosaic of national policies combating market failures has come into existence. Ironically, all these policies give rise to a new type of market failure—which can be called a second-order market failure—as they cause serious impediments to international trade by requiring actors in international transactions to adapt to different transactional moulds. National governments realize that it is in their common interest to mitigate the effect of this second- order inefficiency and to negotiate with other nations so as to reduce the disparity among transactional moulds. The World Trade Organization provides a framework for such international agreements based mainly on the principles of
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nondiscrimination and reciprocity. The rules established through this mechanism have achieved, among other t hings, a reduction of barriers to trade resulting from national technical and safety standards. Member countries of the European Union even go several steps further by accepting more stringent measures that are decided on by majority vote.
3.7. Dynamics of the Relations between Law and Market Exchange In the above discussion, we have argued as if rules, regulations, and laws precede market transactions, such that the latter have to adjust to existing legal moulds. In reality, the situation is somewhat different. For example, actors might create new transactions that are designed to circumvent existing rules while remaining within the law. This is an attractive course of action if t hese rules are found to be oppressive in one way or another. Alternatively, entirely new products might be developed for which there does not yet exist pertinent legislation, a situation that occurred with the introduction of internet services. Over the course of time, t hese new types of market transactions (new form or new content) may appear to have undesirable outcomes. This may then be the start of the long process of devising and applying new rules to correct the failure. In this case, regulation follows a fter exchange innovations.
Any exchange transaction is based on an agreement among participants. This agreement is embodied in the implicit (verbal) or explicit contract entered into by the parties involved. The exchange configuration for the use of an automobile provides a good illustration of the large number of different transactions and underlying contracts that may ensue, depending on the different characteristics of the actors (users and providers of this serv ice), the characteristics of the item (the exact nature of the serv ice to be provided), and the environment (in partic ular, the prevailing legal framework). Let’s review briefly some of the options, resulting transactions, and contracts available to potential users of the serv ice of a car In the setting of an advanced country, such as the United States, the simplest transaction could be purchasing the car outright from a dealer or private party, entering into a sales contract, and receiving the title. A second option could be a lease agreement with a car manufacturer (or its dealer) over a given extended period with or without the option to purchase the car at the end of the lease period. A third option, if the potential user only required the car for a short period, would be to rent a car from a rental company such as Hertz or Avis. A fourth option, if
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the user only needed a one-time ride to a nearby destination, would be to call a cab or an Uber driver. T here are still other alternatives available, such as “ride sharing” and car pools. The point is that the selected transaction depends on the characteristics of the actors (particularly the tastes, needs, and wealth of the potential users), the characteristics of the item (such as cost, length of time service is needed, and accessibility), and the characteristics of the environment (especially the legal environment). The actors will select that transaction that minimizes transaction costs. The contract or legal instrument covering a given selected transaction can be argued to embody (reflect and capture) all the specific characteristics of our three elements of exchange. This is why we believe that the exchange configuration approach should be of operational usefulness to researchers focusing on the interface between law and economics.
Notes 1. One can find literally dozens of definitions of “market” in the literature emphasizing different characteristics and thereby illustrating the lack of common ground. 2. For details, see Cornelisse and Thorbecke (2010). 3. In section 3, we explore more specifically the link between the legal environment (legal characteristics) and market transactions. 4. In fact, a more detailed disaggregated distinction is often necessary. For example, agricultural commodities differ in so many respects (e.g., degree of perishability, their uses, their seasonal production pattern) from, say, industrial products that the exchanges involving these product (sub)groups w ill be influenced by different sets of product or factor characteristics. 5. In Thorbecke and Cornelisse (2014), we present two almost polar examples of very different configurations—one in the setting of a village economy (a “friends and family” credit exchange configuration) and one in the setting of the global economy (a financial exchange configuration mimicking the 2007 financial crisis)—following the schema shown in figure 9.1. 6. For a full discussion of this subject, see Cornelisse and Thorbecke (2010, 59 and subsection 3.2.3). 7. The public sector is defined here as consisting of national, state/provincial, and local governments.
References Cornelisse, P. A., and E. Thorbecke. 2010. Exchange and Development. Cheltenham, UK: Edward Elgar. Eggertson, T. 1991. Economic Behavior and Institutions. Cambridge: Cambridge University Press. North, D. C. 1990. Institutions, Institutional Change and Economics. Cambridge: Cambridge University Press. Simon, H. A. 1957. Models of Man. New York: John Wiley & Sons.
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Thorbecke, E., and P. A. Cornelisse. 2014. “Exchange and Development.” Revue d’Économie du Développement 22: 5–24. Williamson, O. E. 1975. Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press. Williamson, O. E. 1985. The Economic Institutions of Capitalism. New York: Free Press. Williamson, O. E. 1996. The Mechanisms of Governance. New York: Oxford University Press. Williamson, O. E. 2000. “The New Institutional Economics: Taking Stock and Looking Ahead.” Journal of Economic Literature 38: 595–613.
10 REIMAGINING GOVERNANCE THROUGH THE ROLE OF LAW A Perspective from the World Development Report 2017 Luis F. López-Calva and Kimberly B. Bolch
The chapters in this volume cover a fascinating range of topics—from the need to reimagine antitrust laws in the face of changing technology to the historical importance of social connections for doing business in China. Each chapter prompts us to think more critically about the fundamental links between law, economics, and development. In this commentary, we view the ideas presented in these chapters through the lens of the “functionalist” approach to law developed in the World Development Report 2017 on Governance and the Law (World Bank 2017; referred to as WDR 2017 in this chapter)—and encourage the reader to think more precisely about commonly invoked (but rarely defined) concepts, such as “law,” “governance,” and “elites.”
A Functionalist Approach to Law What do we mean by “law”? Throughout the chapters in this book, the term is somewhat broadly applied to mean state-enacted rules. It is important, however, to recognize that not all rules are created equal. Following a simple classification structure proposed by Acuña and Tomassi (1999), we can think about rules as belonging to three different levels. Low-level rules refer to specific policies (such as the antitrust legislation discussed in chapter 6), mid-level rules refer to orga nizational structures (such as membership in the European Union, as discussed in chapter 7) and high-level rules refer to “rules about making rules” (such as election processes, as discussed in chapter 1). Fundamentally, all three types of these 195
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rules are the result of agreements among actors. We can think of the bargaining process through which actors—state and non-state actors—design and implement t hese rules as “governance.” Typical debates on governance center on the notion of the rule of law. While an unequivocally admirable objective, the “rule of law” is not necessarily the best analytical category for understanding the links between law and development— as it represents an ideal state rather than a process. The rule of law implies that rules are applied impersonally and that the rulers are also subject to the rules. As such, it is a norm in itself, an agreement among actors, an outcome. Thinking about the “role of law,” however, helps us to trace the various pathways through which rules can potentially influence economic, social, and political outcomes. As argued in the WDR 2017, we can think about three primary—though not unique—roles that law plays in promoting development: ordering power, ordering behavior, and ordering contestation. One role that law plays is ordering power—by conferring and limiting the power given to different state actors. In this volume, chapter 1 by Monga reflects on this role of law—and the consequences when it is ineffectual. In his discussion on the global disillusionment taking place within many “democratic” countries around the world, Monga draws attention to the failure of law in many of societies to hold politicians accountable when they act beyond their legally granted powers. This scenario is encapsulated in his opening description of “Terror Tuesday” in the White House—during which the US president makes executive decisions regarding the targeted killings of suspected terrorists around the world. Another role that law plays is ordering behavior—by establishing a common set of economic and social rules to coordinate the action of individuals and organ izations. Chapter 2 by Hoff and Walsh specifically zooms in on this role of law. In the authors’ exposition of what they refer to as “the schematizing function of law” (the way law constructs or deconstructs our cultural categories), they explore how law serves as a focal point for coordinating behavior. One key result of this, they argue, is the potential to reduce harmful social biases. They show, for example, how laws reserving political leadership positions for w omen in villages in India helped to collectively shift discriminatory gender norms against w omen serving in such positions. Law also plays a role in ordering contestation—by serving as a peaceful tool to challenge undesirable rules or to adapt rules to changing circumstances. Chapter 4 by Swamy engages with this role of law at various points. In his analysis of the changing history of rural credit markets in India, he describes the extensive legal tug of war over the rural credit markets. In one example that he details about the pursuit of greater autonomy of credit cooperatives from the state, after the failure of petitioners to achieve a favorable verdict by the Supreme Court, they
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go so far as to enact a constitutional amendment. This use of law to contest institutional practices stands in stark contrast to the historical episode Swamy describes at the beginning of the chapter—in which Deccan peasants “rioted” and attacked moneylenders in their frustration with the status quo. Strengthening the different roles that law plays is essential to helping societies move toward a stronger rule of law. While an extensive literature exists that explores transitions to democracy, we know much less about how transitions to the rule of law take place (Fukuyama 2010; Mungiu-Pippidi 2017). Moreover, understanding this transition may be more universally meaningful for societies. As Monga argues, in today’s world, the term “democracy” is hardly robust to the myriad ways in which democracy actually functions around the world. Rather than focusing on organizational “forms,” such as democracies or autocracies— we should take a more functionalist approach to law. We should focus on how specific laws—in their different roles—reinforce or undermine the key governance functions that allow individuals to sustain agreements (commitment function), voluntarily abide by the rules (cooperation function), and react to other p eople’s expected actions in a socially constructive manner (coordination function).
Law in a Changing World A key contribution of this volume is how it grapples with law and economics in the context of a rapidly changing world characterized by massive technological advancements and increasing globalization. Without careful attention to how these new forces are changing the nature and sustainability of agreements among actors, societies may miss out on taking full advantage of the different roles of law in promoting development. It is quite possible that the “best solution” in the past may no longer be a good solution for the f uture—and may even be a detrimental solution. In particular, chapter 6 by Basu and chapter 1 by Monga critically engage with the need to revisit our laws in this new context, asking if and how different laws need to be adapted for the future. As Basu reflects on how digital technology has reshaped firms’ production into vertically serrated markets, he questions how well antitrust policies are aging. He argues that the consequences of applying historical antitrust laws in today’s market may lead to an equilibrium in which price discrimination excludes most potential buyers while taking the full consumer surplus of t hose who do buy—with consequences for rising inequality. Thus he argues for the need to replace old antitrust laws with a “twin dispersal” approach, in which firm ownership is dispersed more broadly among individuals and firm profits are dispersed more broadly among individuals in the nation.
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Monga (chapter 1) explores these changing dynamics in his reflection on the longevity of constitutions. Drawing attention to what he refers to as an “intrinsic contradiction of democracies,” he asks why p eople should be bound by historical political rules designed for a different era—often an era in which many groups were explicitly excluded from the process that made t hose rules. While constitutions with long lifespans can be critical for promoting credible commitment and coordination within societies, if they do not support a stable and fair bargain, their unquestioned persistence may lead to conflict. Monga raises the question of the relevance of “giving the right to vote to dead people,” but here we argue that in today’s world, we need to think a step further. As we face increasing long-term cooperative challenges, such as climate change, not only do we need to think about the undue weight we are giving to voices from the past in our policy arenas today; we also need to consider the lack of voice of future generations who will be affected by contemporary political decisions. The recent wave of youth protests against the lack of action on climate change reflects these rising frustrations with a political process that fails to take into account the interests of all groups. In Greta Thunberg’s 2018 speech to world leaders at the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP24) in Katowice, Poland, the fifteen-year old climate change activist spoke to t hese concerns: “In the year 2078, I will celebrate my 75th birthday. If I have children maybe they w ill spend that day with me. Maybe they w ill ask me about you. Maybe they will ask why you didn’t do anything while there still was time to act. You say you love your c hildren above all e lse, and yet you are stealing their future in front of their very eyes.”1 The Danish physicist Niels Bohr is quoted to have remarked that “it is very hard to predict, especially the future.”2 Yet, how laws adapt to our constantly changing world is at the heart of imagining what our future looks like. While research in this area may necessarily be somewhat speculative, it is a critical area that we need to seek to understand in greater depth. Discussions about changing technology tend to focus on “the future of work,” but we also want to argue that we need to give equal attention to technology’s potential impacts on the “future of governance.” In our world t oday, there are at least three essential confusions that technology has created in our political process: p eople take access to information as equivalent to knowledge, people take popularity as equivalent to legitimacy, and people take digital identity as equivalent to political voice. As technology lowers the cost of access to information, public debates are increasingly based on unfiltered information. As information is increasingly not appraised for its depth of “truth,” institutional legitimacy is vulnerable to being weakened by popularity based on reductionist approaches to identity. As technology makes it easier for
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eople to participate in social networks, public deliberation is increasingly l imited p to online spaces, while meaningful political engagement—including even voter turnout in electoral democracies—weakens. That favors the rise of clientelistic movements against the strengthening of programmatic party structures. T hese trends pose serious questions for the f uture of governance. However, technology also presents incredible opportunities for the future of governance. It carries with it the potential to broadly restructure power relations and empower citizens—for example, through its role in promoting transparency, enabling collective action, and spreading norms and ideas across borders. While we cannot know what the future holds, we need to critically understand the challenges and opportunities presented by technology for the ways in which it alters how people interact to reshape mindsets, and to reach and sustain agreements— what we call governance.
Changing Law to Reshape the World In every context, when existing rules are no longer effective in pursuing social objectives, it is time for change. While many scholars emphasize narratives of institutional persistence, our institutions are changing all the time. Such changes, however, often take place in incremental ways at the margins of formal law. Rather than the “big” changes that we sometimes see at “critical junctures” following rare episodes of shocks, this type of “small” change happens as the agreements among actors must adapt to frequently changing circumstances—such as changes in actors’ preferences and beliefs or in their incentives. Chapter 2 by Hoff and Walsh describes the iterative process of how laws can change actors’ beliefs and preferences (by changing our cultural categories), which can in turn lead to new laws, which again change beliefs and preferences. This can be a virtuous circle (in which biases are reduced) or a vicious one (in which biases are reinforced). However, as Hoff and Walsh note—some norms can be quite “sticky.” In the case of public leadership in Indian villages, changes in discriminatory norms against women did not begin to take place until after seven years of exposure to w omen leaders. The inelasticity of these types of social norms can make certain changes a very long-term process. This challenge is also reflected in Long’s discussion in chapter 3 about anticorruption efforts in China. As she argues, “the long tradition of reliance on personal relationships dies hard in a traditional society, adding more challenge to the task of corruption fighting.” Where newly introduced laws are in conflict with existing norms, formal or informal, changing the rules on paper may be insufficient to promote the desired outcomes. In some cases, they may even lead to worse outcomes. For example, as
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Hoff and Walsh note in chapter 2, while political reservations for w omen in Indian villages helped change the culture in terms of reduction in gender discrimination, political reservations for Scheduled Castes actually ended up leading to greater harassment of Scheduled Caste students in schools. Adding to the pertinence of the chapters in this book, Basu’s text (chapter 6) makes a central contribution in the context of thinking about how change happens, namely, its nod to game theory. Through the careful acknowledgment of the strategic interaction and responses of individuals and corporations, Basu concedes that change is rarely easy or straightforward—for every action, there is a reaction. Indeed, the process of changing laws and reaching new agreements among actors (what the WDR 2017 refers to as “the rules game”) is a dynamic and iterative process. It is also a process informed by the subsequent impact of the rules on social and economic outcomes for the actors (what the WDR 2017 refers to as “the outcome game”). Together, these two games form an infinite loop. If power is too tightly concentrated in the hands of the few, this neverending loop can potentially undermine democracy by institutionalizing inequality. The discussion of inequality implicitly encompasses the role of certain elites. “Elites” is another term that is widely invoked but rarely defined. While the term “elite” tends to have a negative connotation, it is in fact a neutral descriptor of relative power. In a way, everyone has some degree of “elite-ness” depending on how much we can influence decisions in certain realms. If we define elites as t hose who can directly influence decisions in the policy arena, then the definition is one based on an objective indicator. The rest of us, the citizens, can only influence decisions indirectly, for example, through our vote, through social organization, through po litical organization, or through public deliberation. Although change can be driven from the “top-down” (elite-led) or from the “bottom-up” (citizen-led)—it always results from a bargaining process that involves elite actors behaving in their own interests. Indeed, as Francis Fukuyama (among o thers) has argued—no peaceful social change has been brought about by citizens alone. In that sense, peaceful change tends to emerge from coalitions between citizens and change-friendly elites. All the chapters in this volume emphasize important aspects of law for development and discuss potential ways in which it can or should be changed—ranging from greater regulation to greater deregulation. Few of them, however, pay sufficient attention to how the existing power relations in society could support the necessary coalitions for key actors to promote the desired changes. Who w ill lead these changes? What is the nature of the elite bargains in a given society? It is generally more common to think in abstract terms about the rules required to solve economic or social problems, than to think seriously about how power asymmetries manifest themselves in the political arena and how these reforms may either be infeasible or vulnerable to capture. As Basu cautions in chapter 6, “the
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challenge is to create a blueprint for an equitable society that is v iable. History is replete with systemic shifts that began with the right intentions but ended up with a few p eople capturing both political power and wealth.” In the language of the WDR 2017, we need to think about reforms that create a “virtuous circle”—in which the “rules game” and the “outcome game” reinforce each other in promoting a more equitable, prosperous, and peaceful society. The chapters in this book contain eloquent examples of how to think seriously, and realistically, about t hese reforms.
Notes 1. From speech transcript “Ms. Greta Thunberg -High-level Segment Statement COP 24.” United Nations Framework Convention on Climate Change. December 21, 2018. https://unfccc.int/documents/187780. 2. While the origin of this saying is contested, the remark is attributed to Bohr in several texts, including Stanislaw M. Ulam’s 1976 book Adventures of a Mathematician.
References Acuña, C., and M. Tommasi. 1999. “Some Reflections on the Institutional Reforms Required for Latin America.” In Institutional Reforms, Growth and H uman Development in Latin America. Conference Volume. New Haven, CT: Yale Center for International and Area Studies. Fukuyama, F. 2010. “Democracy’s Past and F uture: Transitions to the Rule of Law.” Journal of Democracy 21(1): 33–44. Mungiu-Pippidi, A. 2017. Transitions to Good Governance: Creating Virtuous Circles of Anti-corruption. Cheltenham, UK: Edward Elgar Publishing. World Bank. 2017. World Development Report 2017 on Governance and the Law. Washington, DC: World Bank.
11 BEYOND LAW AND ECONOMICS Legitimate Distribution without Legislation? Nicole Hassoun
Traditionally, scholars of law and economics apply the principles of economics to analyze legal problems (or consider how legal principles can guide market development). Some of this analysis has gone beyond positive modeling and prediction to the normative task of recommending policy based on the relevant analysis. In chapter 7 of this volume, for instance, Yair Listokin argues that central banks should consider using capital and/or price controls to achieve policy objectives. Kaushik Basu suggests requiring that firms share profits with everyone in the nation when anti-trust legislation is neither effective nor efficient at protecting consumers against monopoly power (Basu 2019).1 The current chapter suggests that we might best advance the new field of law and economics by applying philosophical, as well as legal and economic, analysis to possible policy proposals derived from economic models in evaluating and advancing them. It illustrates this idea by considering when technocrats may legitimately implement policy proposals along the lines suggested h ere. In doing so, it aims to advance the field primarily by raising some new concerns and considering how to address them. When a central bank raises interest rates, trade ministers decide to put countries on intellectual property watch lists, or a specialist at the Global Fund decides how to calculate the lives saved with its interventions, their decisions can greatly affect the allocation of resources within, and between, societies. The Global Fund’s calculations, for instance, go into its aid allocation formula. So, with one swipe of his or her pen, the specialist charged with d oing the calculations drastically affects the lives of millions. When a central bank raises interest rates or a trade
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minister lists a country on its intellectual property watch list, millions of people may benefit, while millions may also suffer. When is it legitimate for technocrats to make such decisions? That is, when is this exercise of political power morally permissible? What follows considers this question. First, a few words about legitimacy, who qualifies as a technocrat, and what constitutes a decision with significant allocative consequences. Let us say an entity is legitimate only if “it is morally justified in wielding political power” (Buchanan 2002, 689). In this sense, legitimacy is normative as opposed to descriptive and moral as opposed to legal. Moreover, if decisions are legitimate, those subject to them may have to abide by them, but in what follows, I w ill not assume that legitimacy generates an obligation to abide by the decisions.2 I use the term technocrat broadly to include executives, policymakers, and o thers who make allocative decisions but are neither democratically elected nor directly appointed by elected officials.3 Most technocrats, as I use the term, have some relevant skill that may help them make good decisions, but this need not be the case. Similarly, they need not have expertise in science or industry. I will suppose that a decision that affects the distribution of resources necessary for many p eople to live well w ill qualify as a decision with significant allocative consequences. Such “technocratic” decisions can include changing tax laws, increasing international aid, raising tariffs, and so forth. These decisions’ consequences can be more or less significant, depending, for example, on the number of lives they affect. There are many classical philosophical theories about what makes governments legitimate, and some of the principles they offer clearly apply to technocratic decisions. Some believe, for instance, that a decision is legitimate when those subject to it cannot do better than to abide by the decision (Raz 1986). According to these theories, whenever decisions are essential for people to reap large benefits from coordinating our actions, people should follow them regardless of their origin. It matters that someone decides whether we should all drive on the left-or right-hand side of the road, and once someone decides, we all have good reason to abide by the decision, but it does not m atter who decides (Simmons 1976; Locke 1980; Kant 1999; Rawls 2007; Hassoun, 2008; Peter 2013). It is less clear that other classical philosophical theories have any bearing on what individual technocrats can legitimately do. On some theories, the process that generates the decision is essential to its legitimacy (Benhabib 1994; Buchanan 2002; Estlund 2008; Peter 2008). For instance, some endorse theories on which only democratic processes legitimate the rules—that is, the rules are only legitimate when they are the rules of the majority (Rousseau 1974 [1712–1778], I:6 sec. 3.3; Christiano 1996; Valentini 2012). It is not obvious that these theories tell us what
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individual technocrats can legitimately do (unless we assume democratic theories proscribe all nondemocratic allocative decisions). Perhaps many classical accounts of legitimacy do not tell us when technocratic decisions are legitimate because, traditionally, philosop hers have supposed that laws specify all significant allocative decisions in democratic societies. Government officials may run on platforms focused on changing tax rates or welfare spending. When they are able to pass legislation that affects these changes, their actions have at least faced legitimacy. That is, they may be illegitimate, but the burden of proof falls on those who would argue that the action violates important substantive or procedural constraints on democratic decision making (Estlund 2008; Peter 2013). Today, however, many decisions affect the allocation of resources outside of legislation (and technocratic decisions may have much more drastic effects on allocation than many legislative decisions that focus expressly on resource allocation). As Allen Buchanan puts it, “a technocratic elite, lacking in democratic accountability . . . is playing an increasingly powerful role in a system of regional and global governance,” and I believe the same is true within countries (Buchanan 2003, 289). In many countries technocrats regulate health and safety, the quality of goods and serv ices, the terms of trade, social discrimination, and more. Moreover, technocrats often make decisions implicitly, if not expressly, aiming to affect the distribution of resources. More recently, however, philosophers have started to consider legitimacy beyond governments, and these debates also bear on the legitimacy of technocratic decisions. For instance, consider debates about the legitimacy of nongovernmental organizations (international institutions, aid groups, and corporations) that influence the distribution of resources in or between societies. There are ways in which some of t hese organizations’ decisions are determined by governments. Many international institutions’ decisions and funding streams, for instance, depend directly on government support. So, some maintain that it suffices if states consent to the general structure of international rules these organizations promulgate (Beitz 1998; Rawls 1999; Cavallero 2003). But some argue that corporations, nonprofit groups, and even international organizations’ officials cannot make legitimate decisions about allocation, because they are not appropriately democratic (Benhabib 1994; Held 1995; Buchanan 2002; Caney 2006; Valentini 2012, 2014; Hassoun 2018). Others point to the consequences of the decisions in trying to determine whether they are legitimate or hold that the decision makers must only appropriately represent their constituents’ interests (Held 1995; Stilz 2009). Yet others insist that the organizations’ officials must make decisions through appropriate procedures and respect basic rights (Cohen and Sabel 2005; Buchanan and Keohane 2006; Abizadeh 2008; Valentini 2012).
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It seems hard to deny that some technocratic decisions are legitimate. Likely, this seems plausible because the decisions are so widespread that denying their legitimacy may amount to, unintuitively, denying most governments’ legitimacy. But there are also plausible theoretic reasons to endorse this conclusion. Likely, the legitimacy of the decision will vary, depending on the nature of the decision itself. Plausibly, it matters how significant the decision is and what other options are available. At least in the absence of fully just institutions, there may be some room for technocrats to make decisions that can improve allocation significantly (Buchanan 2003; Caney 2006; Dietsch 2017). Even if a given decision has some negative consequences, the alternative may be so bad that it is legitimate (Adler 2005). Imagine, for instance, that reducing interest rates is essential for a country to avoid a recession. If doing so is legal, does not have unintended bad effects, and t here are no better options, then the central bank might be justified in reducing the rate.4 Technocrats may have more license to make decisions when there are just institutions in place to compensate for any unjust consequences. Some observers endorse the institutionalist thesis, which holds that individuals subject to just institutions should be free to make decisions within the confines of whatever laws they face (Waldron 1987; Murphy 1998). The idea is that society should divide moral labor so that background institutions provide rules within which individuals may generally pursue their interests (Rawls 1971; Nagel 1991, ch. 6, 9; Murphy 1998). For “people lead freer and better lives . . . if they can devote most of their concerns to their own affairs” (Murphy 1998, 258). Perhaps we can extend the idea so that technocrats should be f ree even to make significant allocative decisions, as long as laws can compensate for any unjustified consequences of their actions (Edmundson 1998; Greene 2016). Imagine, for instance, that a trade policy makes it more difficult for many poor farmers in Scotland to export wool. The Scottish government might compensate these people by taxing wool imports and redistributing the gains to exporters (if that is what justice requires).5 Still, many observers worry that technocracy (the proliferation of technocratic decisions) is incompatible with democratic values, public participation, representative governance, flexibility in the face of crises, or responsiveness to subjects’ values. Others worry that technocracy cannot register discontent appropriately, restricts debate to those well versed in technical language, only represents the interests or values of the elite, and so forth (Tucker 2018, 219). I might propose a minimal (necessary) condition for legitimate technocratic decisions with significant allocative consequences: Those affected by the decision should have a say in the process by which it is made, so that the allocation is appropriately responsive to their interests, at least when aspects of the decision exceed the decision maker’s expertise.6 It is plausible that t hese decisions w ill be better and fairer than those that do not take into account the affected people’s
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interests.7 Moreover, this principle might elicit an “overlapping consensus” amongst those with very different philosophical views on legitimacy (Christiano 1996).8 After all, most stronger principles either strengthen requirements on the outcome of the decision (perhaps only correct decisions are appropriately responsive to interests) or on the process by which the decision is made (perhaps every one should have an equal say in the process of making the decision). A notable exception is the account of legitimacy with which we started, where a decision is legitimate whenever those subject to it cannot do better but to abide by the decision (Raz 1986). Even t hose who accept this account can get on board, however, if we weaken the principle so that it just requires consultation and responsiveness to interests whenever that helps technocrats make better decisions. Many questions remain: Do the legitimacy of technocrats’ decisions hang on whether elected representatives can make these decisions? Can a central bank change interest rates on its own if it cannot get government approval to do so on time to avoid a recession, for instance? Can technocrats ever make legitimate decisions that go against democratically endorsed laws (Beitz 1979; Hassoun 2018)? Can a central bank ever legitimately change interest rates to prevent a recession if doing so is illegal, for example? Does it matter if the express purpose of policies is distributive or whether people understand the distributive consequences of their policy choices (Blake 2001)? Should technocracy constitute a separate sphere from politics (that is, be free, and perhaps insulated, from direct political control)?9 How much (if any) discretion should technocrats have when their decisions do not contravene the law?10 Even if, in principle, some technocrats can make legitimate significant allocation decisions outside (if not against) the law, does it matter who in these organizations is making the decision?11 Does it matter if these decisions are made by executives, policymakers, scientists, or philosophers?12 It is impossible to address t hese questions further h ere. Considering them is, however, extremely important in our time, when technocratic decisions affect the fates of millions and their allocative consequences may be much more significant than t hose expressly determined by law. More generally, applying philosophical, as well as legal and economic, analysis to possible policy proposals may be essential for evaluating and advancing them.
Notes 1. In other work, Kaushik Basu also suggests redistributing firms’ profits to those who are discriminated against in markets perhaps instead of enforcing laws against discrimination, although this might be affected in many ways (Basu 2018). Although both outcomes might be affected by a change in law, he might be amenable to market-based mechanisms for achieving them that are implemented by technocrats.
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2. Let me further explain the kind of legitimacy at issue. I am asking: When is it morally permissible for technocrats to make decisions with significant allocative consequences? The answer to this question may have some bearing on when people should abide by the decisions, but I am not asking: When do most p eople think it is morally permissible for technocrats to make decisions with significant allocative consequences and when do they think they should abide by such decisions? (Weber 1964; Dworkin 1986; Raz 1986; Rawls 1993; Wellman 1996; Blake 2001; Buchanan 2002; Ripstein 2004; Hassoun 2008). Nor am I asking: When are t hese decisions legal? (Although it may turn out that it is morally permissible for technocrats to make decisions with significant allocative consequences whenever they are legal.) 3. Perhaps a better word would be “functionary” or “administrator,” as even unelected members of the judiciary or military may qualify u nder this definition. But each term has its drawbacks, so I will continue to use the term “technocrat” in what follows. A related question is: When (if ever) are administrative agencies’ decisions legitimate when they are not determined by elected representatives? 4. In evaluating decisions, it may also be helpful to distinguish between decisions that are unconstrained and those that are constrained by law, guidelines, and principles. It may also matter w hether the decision is executive, legislative, or judicial, and the degree to which it is subject to elected representatives’ control. 5. This is so even though laws are often imperfect, and institutions are rarely fully just—fair taxation e tc. may rarely compensate for the allocative consequences of technocratic decisions (Buchanan and Keohane 2006; Dietsch 2017). 6. Note that this requirement is more stringent than requiring that the decision provide gains over those normally available via direct control by elected representatives— who may not be able to implement or maintain their decisions over time, given the changing tides and demands of politics. It also requires that the decisions appropriately respond to the affected party’s interests and not just that they are accountable to those who are capable of judging the decisions (Wallach 2016). 7. Here one might appeal to arguments that democratic theorists use to establish democracy’s instrumental value—for example, grounded on the Condorcet Jury Theorem. For discussion, see Christiano (1996). 8. My argument here is not that (normative) legitimacy requires an overlapping consensus among t hose with different perspectives on legitimacy (never mind politics more broadly). Where those perspectives are mistaken, it is not clear that they always merit consideration. Still, the principle may secure wide support. For a different perspective, see Tucker (2018), which also nicely considers how technocrats in independent agencies can threaten democratic decisions in practice. I agree, however, that the condition for legitimacy I propose is not sufficient for full legitimacy. Moreover, it is essential to consider institutional stability and implementation when setting out an account of legitimacy. See also Ackerman (2000). 9. Woodrow Wilson (1887) argued for this conclusion in his classic “Study of Administration.” 10. Must they adhere to something like constitutional principles and support the rule of law, separation of powers, and so forth (DeMuth 2016; Tucker 2018)? 11. Alternately, it may m atter which organizations are at issue—both their records as well as their mandates (contra Tucker 2018, 213). 12. It is also important to consider how decisions should be made (e.g., by committees or individuals with staggered terms) and what protections the groups and individuals making technocratic decisions have in doing so—budgetary control, job security, and so forth (Strauss 1984; Tucker 2018).
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References Abizadeh, Arash. 2008. “Democratic Theory and Border Coercion: No Right to Unilaterally Control Your Own Borders.” Political Theory 36(1): 37–65. Ackerman, Bruce. 2000. “The New Separation of Powers.” Harvard Law Review 113(3): 633–729. Adler, Matthew D. 2005. “Justification, Legitimacy, and Administrative Governance.” Issues in Legal Scholarship. Available at: https://scholarship.law.duke.edu/faculty_scholarship /2588. Basu, Kaushik. 2018. Republic of Beliefs. Princeton, NJ: Princeton University Press. Basu, Kaushik. 2019. “Antitrust Law in the Age of New Technology: Is It Time to Call It a Day?” Available at https://www.iza.org/publications/pp/146/new-technology-and -increasing-returns-the-end-of-the-antitrust-century. Beitz, Charles. 1979. Political Theory and International Relations. Princeton, NJ: Prince ton University Press. Beitz, Charles. 1998. “International Relations, Philosophy of,” in Edward Craig (ed.), Routledge Encyclopedia of Philosophy. London: Routledge. Benhabib, Seyla. 1994. “Deliberative Rationality and Models of Democratic Legitimacy.” Constellations 1(1): 25–53. Blake, Michael. 2001. “Distributive Justice, State Coercion, and Autonomy.” Philosophy and Public Affairs 30(3): 257–296. Buchanan, Allen. 2002. “Political Legitimacy and Democracy.” Ethics 112(4): 689–719. Buchanan, Allen. 2003. Justice, Legitimacy and Self-Determination. Oxford: Oxford University Press. Buchanan, Allen, and Robert O. Keohane. 2006. “The Legitimacy of Global Governance Institutions.” Ethics and International Affairs 20(4): 405–437. Caney, Simon. 2006. “Cosmopolitan Justice and Institutional Design: An Egalitarian Liberal Conception of Global Governance.” Social Theory and Practice 32(4): 725–756. Cavallero, Eric. 2003. “Popular Sovereignty and the Law of Peoples.” Legal Theory 9(3): 181–200. Christiano, Thomas. 1996. The Rule of the Many: Fundamental Issues in Democratic Theory. New York: Westview Press. Cohen, James, and Charles Sabel. 2005. “Global Democracy?” New York University Journal of International Law and Politics 37(4): 763–797. DeMuth, Christopher. 2016. “Can the Administrative State Be Tamed?” Journal of Legal Analysis 8(1): 121–190. Dietsch, Peter. 2017. “Normative Dimensions of Central Banking: How the Guardians of Financial Markets Affect Justice.” In Lisa Herzog (ed.), Just Financial Markets? Finance in a Just Society. Oxford: Oxford University Press, ch. 10. Dworkin, Ronald, 1986. Law’s Empire. Cambridge, MA: Harvard University Press. Edmundson, William A., 1998. Three Anarchical Fallacies. Cambridge: Cambridge University Press. Estlund, David, 2008. Democratic Authority. Princeton, NJ: Princeton University Press. Greene, Amanda. 2016. “Consent and Political Legitimacy.” In David Sobel, Peter Vallentyne, and Steven Wall (eds.), Oxford Studies in Political Philosophy. Oxford: Oxford University Press, 71–97. Hassoun, Nicole. 2008. “World Poverty and Individual Freedom.” American Philosophical Quarterly 45 (2): 191–198. Hassoun, Nicole. 2018. “The Evolution of Wealth; Democracy or Revolution?” In Jack Knight and Melissa Schwartzberg (ed.), Wealth: NOMOS LVIII. Oxford University
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Press Scholarship Online. Available at: https://www.universitypressscholarship .com/v iew/10.18574/nyu/9781479827008.001.0001/upso-9781479827008. Held, David. 1995. Democracy and the Global Order. Palo Alto, CA: Stanford University Press. Kant, Immanuel. 1999. Practical Philosophy. In Mary J. Gregor (ed.), Cambridge Edition of the Works of Immanuel Kant in Translation. Cambridge: Cambridge University Press. Locke, John. 1980 [1690]. Second Treatise on Civil Government, C. B. MacPherson (ed.). Indianapolis: Hackett, 1990. Murphy, Liam. 1998. “Institutions and the Demands of Justice.” Philosophy & Public Affairs 27(4): 251–291. Nagel, Thomas. 1991. Equality and Partiality. New York: Oxford University Press. Peter, Fabienne. 2008. Democratic Legitimacy. New York: Routledge. Peter, Fabienne. 2013. “The Procedural Epistemic Value of Deliberation.” Synthese 190(7): 1253–1266. Rawls, John. 1971. A Theory of Justice. Cambridge, MA: Harvard University Press Rawls, John. 1993. Political Liberalism. New York: Columbia University Press. Rawls, John. 1999. The Law of Peoples. Cambridge, MA: Harvard University Press. Rawls, John. 2007. Lectures on the History of Political Philosophy. Cambridge, MA: Harvard University Press. Raz, Joseph. 1986. The Morality of Freedom. Oxford: Oxford University Press. Ripstein, Arthur. 2004. “Authority and Coercion.” Philosophy and Public Affairs 32(1): 2–35. Rousseau, Jean-Jacques. 1974 [1712–1778]. The Essential Rousseau: The Social Contract, Discourse on the Origin of Inequality, Discourse on the Arts and Sciences, The Creed of a Savoyard Priest. New York: New American Library. Simmons, A. John. 1976. “Tacit Consent and Political Obligation.” Philosophy and Public Affairs 5(3): 274–291. Stilz, Anna. 2009. Liberal Loyalty: Freedom, Obligation, and the State. Princeton, NJ: Princeton University Press. Strauss, Peter L. 1984. “The Place of Agencies in Government: Separation of Powers and the Fourth Branch.” Columbia Law Review 84(3): 573–669. Tucker, Paul. 2018. Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. Princeton, NJ: Princeton University Press. Valentini, Laura. 2012. “Assessing the Global Order: Justice, Legitimacy, or Political Justice?” Critical Review of International Social and Political Philosophy 15(5): 593–612. Valentini, Laura. 2014. “No Global Demos, No Global Democracy? A Systematization and Critique.” Perspectives on Politics 12(4): 789–807. Waldron, Jeremy. 1987. “Theoretical Foundations of Liberalism.” Philosophical Quarterly 37(147): 127–150. Wallach, Philip A. 2016. “The Administrative State’s Legitimacy Crisis.” Center for Effective Public Management, Brookings Institution, Washington, DC. Available at: https://www.brookings.edu/wp-content/uploads/2016/07/Administrative-state -legitimacy-crisis_FINAL.pdf. Weber, Max. 1964. The Theory of Social and Economic Organization, Talcott Parsons (ed.). New York: Free Press. Wellman, Christopher. 1996. “Liberalism, Samaritanism, and Political Legitimacy.” Philosophy and Public Affairs 25(3): 211–237 Wilson, Woodrow. 1887. “The Study of Administration.” Political Science Quarterly 2(2): 197–222
About the Contributors
Kaushik Basu is Carl Marks Professor of International Studies at Cornell University and is currently president of the International Economic Association. He was formerly chief economist at the World Bank. His most recent book is The Republic of Beliefs: A New Approach to Law and Economics (Princeton University Press, 2018). Kimberly B. Bolch is a doctoral candidate in International Development at the University of Oxford and a consultant for the United Nations Development Programme. Previously, she worked with the World Bank Group as a core team member of the World Development Report 2017 on governance and the law and as a junior professional associate in the Poverty and Equity Global Practice. Her primary research interests focus on the political economy of poverty, inequality, and social policy. Her current research explores processes of inclusive state-building, with an emphasis on the role of conditional cash transfer programs in Latin America. Marieke Bos is an economist and deputy director at the Swedish House of Finance at the Stockholm School of Economics. She also holds a visiting scholar position at the Federal Reserve Bank of Philadelphia Consumer Finance Institute. Marieke’s research focuses mainly on individuals’ decision making in the field of household finance and empirical banking. Marieke has won the 2019 Michael J. Brennan Best Paper Award for her paper with Emily Breza and Andres Liberman, “The Labor Market Effects of Credit Market Information,” published in the Review of Financial Studies, and the 2017 Hans Dalborg award for excellence in Financial Economic Research. Susan Payne Carter is an associate professor of Economics at the United States Military Academy, West Point. Her PhD was in Economics from Vanderbilt University and her BS in Mathematical Economics from Wake Forest University. Her research focuses on applied microeconomics topics, specifically, consumer finance, labor, education, and law and economics. Peter A. Cornelisse studied u nder and worked with Nobel Prize winner Jan Tinbergen in the field of development economics at the Netherlands School of Economics, forerunner of the present-day Erasmus University Rotterdam. He obtained MA and PhD degrees from EUR, both cum laude. He worked at the 211
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About the Contributors
Turkish State Planning Organization in Ankara from 1965 to 1967 and at the Instititut de Développement Économique et de Planification in Dakar, Senegal, from 1969 to 1971. He was appointed professor of Development Economics at EUR in 1977 and guest professor at Cornell University during the same year. He then switched from development economics to public finance in 1988 and participated in consultancy missions to a.o. Sudan, Egypt, Burkina Faso, Pakistan, Indonesia, and Thailand. Now he is emeritus professor of Public Finance. Gaël Giraud is chief economist and executive director of the Research and Knowledge Directorate of the Agence Française de Développement. He has also served as a member of the Expert Committee on the National Debate about the Energy Shift for the French government, chairs the “Energy and Prosperity” group supported by Ecole Normale Supérieure, Ecole polytechnique, ENSAE, and Louis Bachelier’s Institute, and serves as a member of the European NGO Finance Watch and the Nicolas Hulot Foundation. Nicole Hassoun is a visiting scholar at Cornell University and professor of philosophy at Binghamton University. She has published widely in such journals as the American Philosophical Quarterly, Journal of Development Economics, Australasian Journal of Philosophy, European Journal of Philosophy, PLoS One, and Philosophy and Economics. Her first book, Globalization and Global Justice: Shrinking Distance, Expanding Obligations was published by Cambridge University Press in 2012, and her manuscript Extending Access to Essential Medicines: The Global Health Impact Project is forthcoming with Oxford University Press. Robert C. Hockett is Edward Cornell Professor of Law at Cornell Law School and professor of public affairs at Cornell University. He is senior counsel at Westwood Capital, a fellow at the C entury Foundation, and a consultant for the Federal Reserve Bank of New York, the International Monetary Fund, Americans for Financial Reform, and the Occupy Cooperative, in addition to several federal and state legislators and local governments. Karla Hoff is Visiting Professor of Economics and International Affairs at Columbia University. She is currently writing Malleable Minds: A New Perspective on What Makes Economic and Social Progress Possible (to be published by Columbia University Press). She co-directed the World Bank’s World Development Report 2015: Mind, Society, and Behavior and served in the World Bank’s Development Research Group from 1999 to 2020. She has published papers in the American Economic Review that explain how segregation between renters and homeowners may deepen poverty, how cueing a stigmatized social identity depresses cognitive performance, and how Big Bang privatization in Russia impeded the emergence of a political demand for rule of law. She has co-edited two books, The Economics
About the Contributors
213
of Rural Organization (Oxford University Press, 1993) and Poverty Traps (Prince ton University Press, 2011). Yair Listokin is the Shibley F amily Fund Professor of Law at Yale Law School. His research emphasizes a macroeconomic perspective that differs from the microeconomic perspective that dominates law and economics. Cheryl Long is departmental chair and Professor of Economics at Xiamen University and Professor of Economics in the Wang Yanan Institute for Study of Economics (WISE). She also serves as associate editor and a member of the Editorial Board of China Economic Review (Elsevier) and co-editor-in-chief of China Economic Studies (Taylor & Francis). She was previously an associate professor in the Department of Economics and director of the Asian Studies Program at Colgate University. Luis F. López-Calva, ASG, is the UNDP Regional Director for Latin America and the Caribbean since September 2018. He has nearly 30 years of professional experience, advising several Mexican governments, in addition to UNDP and most recently the World Bank, where he most recently served as practice man ager of the Poverty and Equity Global Practice (Europe and Central Asia). He was the co-director and lead author of the World Development Report 2017 on “Governance and the Law.” He was previously lead economist and regional poverty advisor in the Bank’s Europe and Central Asia Region, and lead economist at the Poverty, Equity and Gender Unit in the Latin America and Caribbean PREM Directorate, also at the World Bank. From 2007 to 2010, he served as Chief Economist for Latin America and the Caribbean at UNDP-RBLAC in New York. Mr. López-Calva has been associate editor of the Journal of Human Development and Capabilities, and he is a fellow of the H uman Development and Capabilities Association. He has also been the chair of the Network on Inequality and Poverty in the Latin America and Caribbean Economic Association. His research interests focus on labor markets, poverty and inequality, institutions and microeconomics of development, and he has presented his research at top institutions, including Harvard University; Stanford University; University of California, Berkeley; University of California, San Diego; and the Organization for Economic Cooperation and Development Centre. He holds a master’s degree in economics from Boston University, as well as a master’s and a doctorate in economics from Cornell University. Célestin Monga is former vice president and chief economist of the African Development Group and former managing director at the United Nations Industrial Development Organization, senior economic adviser at the World Bank, and the co-author (with Justin Yifu Lin), most recently, of The Oxford Handbook of
214
About the Contributors
Structural Transformation (Oxford University Press, 2019) and Beating the Odds: Jump-Starting Developing Economies (Princeton University Press, 2017). Paige Marta Skiba has conducted innovative research in the area of behavioral law and economics and commercial law, particularly on topics related to her economics dissertation, Behavior in High-Interest Credit Markets. She has been the recipient of numerous research grants and fellowships from such institutions as the National Science Foundation, the Russell Sage Foundation, the National Institute on Aging, the Federal Reserve Board of Governors, the Burch Center for Tax Policy and Public Finance, and the Horowitz Foundation for Social Policy. Professor Skiba serves on the board of the American Law and Economics Association and the Society for Empirical L egal Studies. She earned her PhD in economics from the University of California, Berkeley, in 2007. Professor Skiba teaches Bankruptcy and Behavioral Law and Economics to J.D. students. She also teaches Law and Economics, Behavioral Law and Economics, and Econometrics for Legal Research in the PhD program in Law and Economics. Anand V. Swamy is Willmott Family Third Century Professor of Economics, Williams College. His research focuses on land, labor, and credit markets in India. His publications include “The Hazards of Piecemeal Reform: British Civil Courts and the Credit Market in Colonial India,” published in the Journal of Development Economics, and “Contracts, Hold-Up and Exports: Textiles and Opium in Colonial India,” published in the American Economic Review (both papers jointly with Rachel Kranton), and “Only Twice as Much: A Rule for Regulating Lenders” in Economic Development and Cultural Change (with Mandar Oak). His book Law and the Economy in Colonial India (co-authored with Tirthankar Roy) was published by University of Chicago Press in 2016. Erik Thorbecke is the H. E. Babcock Professor of Economics Emeritus and former director of the Program on Comparative Economic Development at Cornell University. He is the co-founder of the most popular poverty measure used globally by international agencies, governments, and researchers. James Walsh is a doctoral candidate at the Blavatnik School of Government, University of Oxford. His research interests are in behavioral and development economics. He is affiliated with the Centre for Experimental Social Science at Nuffield, Centre for the Study of African Economies at the University of Oxford, and the Institute of Sociology at the University of Bern.
Index
Figures and tables are indicated by “f ” and “t”after the page number. abolish poverty (garibi hatao) governing agenda, 114–115 Acharya, Avidit, 65, 66 ACLED (Armed Conflict Location & Event Data Project), 50n20 actions, sources of, 60 actors: in exchanges, 184–185, 186, 193; game theory on, 182; market failures and, 34, 40; political, 37; post–Civil War, 64–65, 65t; rules and, 196; transaction cost theory on, 182 Acuña, C., 195 Afghanistan, war in, 50n20 African Americans. See Blacks agricultural commodities, exchange of, 193n4 Agricultural Credit Review Committee (Khusro Committee, RBI), 117–118 Agriculturists Loans Act (1884, India), 106 Alford, Robert R., 79n4 All-India Rural Credit Survey, 108 allocations, weak independence of, 174 Andhra Pradesh, India: Agricultural Indebtedness (Relief) Act (1977), 113; microfinance industry in, 120; moneylenders, charges by, 123n19 anger, new economy of, 15–21 anocracies, global trends in, 18f anti-Semitism, relationship to pogroms, 67 antitrust century, end of, 140–156; antitrust century, discussion of, 142–145; introduction to, 6, 140; regulatory challenge of technological change, 141–142; regulatory overhaul, need for, 150–154; serrated industries, 145–147; serrated industries, model for, 147–150 antitrust laws, market failures and, 8 antitrust regime, modern technology and, 145 Armed Conflict Location & Event Data Project (ACLED), 50n20 aspirations, 74, 76–78, 79n11 Atkinson, A. B., 169 authoritarians, targeted killings and, 12–13 autocracies, global trends in, 18f
automobiles: car industry as vertically serrated, 146; exchange configurations for use of, 192–193 Avery, Robert, 138n7, 138n9 Aztec Mexico, violence in, 16 Babcock, Linda, 61 bads (undesirable goods), 191 Bandhan (microfinance institution), 121 Banking Regulation Act (1949, India), 122 barter, 154 Bartlett, Frederic Charles, 58–59 Basu, Kaushik, 6, 57, 140, 152, 197, 200–201, 202, 206n1 Beaman, Lori, 68 Becker, G., 2 behavior, impact of context on, 60 Bell, Clive, 112 benami (land ownership transactions), 105 Bensouda, Fatou, 50n23 Berger, Peter L., 79n4 Berlin Wall, 16, 20, 25 Bertrand, J., 146 Bhave, Acharya Vinoba, 109 Biden, Joe, 43 bilateral bargaining, 151 Blacks (African-Americans): carceral state and, 38; post–Civil War rights, Southern White elite and, 64–66 Bohr, Niels, 198 Bolch, Kimberly, 8, 195 Bombay Cooperative Societies Act (1925, India), 109 Bombay Moneylenders’ Act (1947), 112 bonded labor (slavery), 64–66, 144 Bordalo, Pedro, 79n8 Bos, Marieke, 5, 127, 136 boundedly rational individuals, 58, 60, 78 Bradatan, C., 36 Brahm Prakash Committee (India), 111 Brazil, education levels in, 76–77 Brazilian Math Olympiad, 77 Bretton Woods regime, 158, 159, 161, 162 215
216 Index
Breyer, Stephen, 56 British Raj, 101, 103, 104, 107 Brown, Henry Billings, 55 Brown v. Board of Education, 55 Bruenig, Matt, 153 Bruner, Jerome S., 55, 79n4 Bulgaria, use of currency pegs, 159 Burgess, Robin, 116 Bush, George W., 48n3 Calabresi, G., 2 Campbell, John Y., 136 capital controls, 7, 157–159, 161–164 cars: car industry as vertically serrated, 146; exchange configurations for use of, 192–193 Carter, Susan Payne, 5, 127, 136, 138n5, 138n6 Caskey, John P., 138n7, 138n9 castes, in India, 70, 200 categories and categorization, 55, 56, 79n5 CCT (conditional cash transfer program), 74–76, 76t change: laws’ adaptation to, 198; top-down vs. bottom-up, 200 Chesterton, G. K., 28 child mortality, 18 children, impact of investments in, 72–76, 76t Chile, Western interventions in, 45 China: authoritarian political system, 48n4; currency pegs, use of, 159; National Intelligence Law, 48n6 China, fighting corruption in, 86–100; anticorruption campaigns, effects of, 97–98, 97f; causes of corruption, 91–93; conclusions on, 98; corruption, challenges of fighting, 94–95; corruption and correlates of, 91–95; corruption investigations, numbers of, 87f; empirical evidence for causes and effects of corruption, 96–98; introduction to, 4, 86–88; level of corruption, factors determining, 96; penalties, limitations of, 93; theoretical model of corruption, 88–91 choice: choice environments, 172–174; impact of cultural mental models on, 59–60; individual choices, moral choices vs., 7. See also decisions civil society organizations, 43 Civil War (US), 64 Clayton Act (1914, US), 145 Clinton administration, 46 Cloud Act (Clarifying Lawful Overseas Use of Data Act, 2018), 48–49n6 Coase, R., 2 Cohen, Dov E., 79n4
Cold War, 20 collateral damage, 12 command and coordination function of law, 3, 55, 58, 67f commercialization, in India, 103 commitment function of law, 197 competitive equilibriums, 146, 148, 149f, 150 compound lotteries, 174, 180n9 concepts: influence on preferences, 69; philosophy of, 67–68 conditional cash transfer program (CCT), 74–76, 76t Condorcet Jury Theorem, 207n7 Congo, Western interventions in, 45 Congress (US), approval ratings, 49n11 Constitutional Convention (U.S.), 31 constitutions, lifespans of, 27–28, 198 Consumer Financial Protection Bureau (US), 138n6 cooperation function of law, 197 coordination function of law, 197 Corlet, A., 24 Cornelisse, Peter A., 8, 182, 193n5 Cornell Research Academy of Law, Development, and Economics (CRADLE), 2 corruption: corruption control, problems with, 4; corruption rankings by country, 88t; effects of, 90; market failures and, 8; penalties against, 93, 95; in Punjabi land transfers, 105; study of, 4. See also China, fighting corruption in costs (negative externalities) and external benefits (positive externalities), 189–190 cotton production, during American Civil War, 101 Cournot, A., 142, 146 Cournot oligopolies, 147 CRADLE (Cornell Research Academy of Law, Development, and Economics), 2 Crawford, N. C., 36 credit cooperatives, 107–114 credit scores, uses of, 127 crop insurance scheme (Pradhan Mantri Fasal Bima Yojana, India), 122 cultural categories, persistence of, 56–57, 67. See also law, influence on cultural categories; transformed cultural categories, examples of currency: currency pegs and currency unions, 157–161, 163–164; fixed currency regimes, 164–167; fixed exchange rates, 157–158; impact of devaluation of, 165–166; international-$, 19f; optimal currency areas, theory of, 167n2
Index
Daman Singh and O thers versus the State of Punjab, 1985, 110–111 damdupat (Indian credit rule), 101, 112, 120 Deaton, A., 25–26 debt waivers, 118 Deccan Agriculturists’ Relief Act (DARA, 1879, India), 101, 104 Deccan riots, 101, 104, 197 decisions: decision theory, 169; legitimacy of, 203–206. See also choice “Declaration of Principles for Freedom, Prosperity, and Peace” (manifesto), 49n8 defaults, in pawnbroking, 127–128, 135, 136 deflation, 165–166 démocracies de l’émeute (riot democracies), 14 democracy: crisis of, 29; democracy club, gaining membership in, 46–47; democracy theories, unreliability of, 41; democratic consolidation, requirements for, 41; democratization, 16, 17, 18f, 42, 47; disillusionment in, 17; external interference with, 34–35; global, 2–3, 17; impossibility of conceptualization of, 14–15; intrinsic contradictions of, 28; lack of understanding of, 3, 32–33; mixed responses to, 30; operationalizability of, 13–14; Plato on, 30; resistance to, 29; theoretical challenges of, 12–13; totalitarian democracies, 14 democracy, evaluation of, 11–54; democratic credentials, gaining of, 43–48; democratic deficit, unsustainability of, 27–43; demo cratic trilemma, 15, 32–34, 34f; great discordance, 15–27; introduction to, 2–3, 11–15; market failures in democracy, 34–39; original political sin, 29–32; representative citizens and omniscient political agents, myth of, 39–43 Democratic Party (US), attitudes toward, 26 deposit insurance, 162 deregulation, impact on corruption, 94–95 desegregation of elite schools by income class, reduction of discrimination through, 71–72, 73f devaluation, impact of, 165–166 developing countries, nonmarket exchange relations in, 182 Dhillon, A., 177 Diamond, L., 16 dictator games, 60, 71 DiMaggio, Paul, 61, 79n4 dinosaur risk, 141 discrimination, 71–72, 73f, 79n5 Disposition Matrix (Kill List), 11–12, 14
217
Douglas, Mary, 79n4 drunk driving, 39 duopolies, in serrated industry models, 146 Dworkin, R., 8 East India Company, 103 ECB (European Central Bank), 163–164, 166–167 economics: deflation, 165–166; economic growth, 21, 21f, 93; human actors in, 78; international macroeconomics, 157–164; modern economic theory, 141; subversion of politics by, 15. See also international monetary policy regimes, law and economics as moral science, 169–181; additional discussion on, 177–179; choice environments, 172–174; introduction to, 7, 169–172; risk attitudes, deducing from ethics, 174–177 economies of scale, modern technology and, 145 education: democratization, relationship to, 42; effects of national math competition on, 76–78 efficiency, 33, 144 elephant curve, political economy of, 21–25, 23f elites, 23, 23f, 200 Emergency Stabilization Act (1970, US), 164 Engerman, S. L., 32 environments, in exchanges, 184–185, 193 ethics: deduction of risk attitudes from, 174–177; ethical choice environments, 172–173; ethical democracy, democratic trilemma and, 33; ethical preferences, 171, 174–176, 178–179; ethical utilitarianism, 178; morality vs., 180n2 Europe: rural credit cooperatives, 106–108, 107t; taxation and citizenship in, 31 European Union: European Central Bank (ECB), 163–164, 166–167; European Commission, 166–167; monetary policies, impact on, 7; Treaty of Lisbon, fundamental freedoms in, 164 exchange configurations and legal framework, 182–194; conclusions on, 192–193; exchange configuration approach, 184–186, 187f; exchange process, alternative approaches to, 183–184; introduction to, 8, 182–183; logic underlying, 186, 187f; market failures, use of legal measures to address, 187–192 exchange-rate policies, 7, 157–158 exclusionary practices, 151 executive pay, 154
218 Index
expected utility, 178 experience, impact on prosociality, 60 exploitative monopolies, 142–143 expressive function of law, 3, 55, 58, 66–67, 67f external benefits (positive externality) and costs (negative externalities), 189–190 external normative order, 66, 67f externality problem, 35–36 extreme poverty, 17, 19f, 23, 23f facts, values vs., 169 fake news, 33, 34–35 Famine Commission (1901, India), 106–108 Farhi, Emmanuel, 168n13 FATCA (Foreign Account Tax Compliance Act, 2010, US), 162 Fatehchand Himmatlal and Others versus the State of Maharashtra, 113 fathers, parental leave for, 58 Federal Trade Commission, 144 financial derivatives, 177 fixed currency regimes, 164–167 fixed exchange rates, 157–158 Fleurbaey, M., 177 Foreign Account Tax Compliance Act (FATCA,2010, US), 162 forgotten markets. See pawnshops formal institutions, corruption and, 94 founding documents, need for revisions to, 47 Founding Fathers, reverence for, 47 France, Yellow Vest movement, 14, 27, 49n9 free-rider problem, 35 frequent flyer programs, 150 Friedland, Roger, 79n4 Friedman, D., 35–36 Friedman, Milton, 158, 164–165 Fukuyama, Francis, 200 Funk, Patricia, 66 Gaddafi, Muammar, 46 game theory, 61–63, 169, 182, 200 Gandhi, Indira, 114–115 Gandhi, Mahatma, 105, 109 garibi hatao (abolish poverty) governing agenda, 114–115 Gates, Bill, 26 Gazetteer of Poona, on Bombay Moneylenders’ Act, 112 Gbagbo, Laurent, 50n23 gender, mental models of, 61–64 Georges Rey, 69 Gine, X., 118 Girard, Victoire, 70
Giraud, Gaël (G.), 7, 169, 177 Glaeser, Edward L., 64 global democracy, 2–3, 17 Global Fund, 202 global preferences, 176 global relative inequality, 21–22 The Globalization Paradox (Rodrik), 160 Goldberg paradigm, 68 Gottlieb, Jessica, 79n7 governance, 8, 17, 18f, 195–201 Government of India Act (1935), 105 Grameen Bank of Bangladesh, 119 greasing-the-wheel theory of corruption, 91, 98 great discordance, 15–27; anger, new economy of, 15–21; elephant curve, political economy of, 21–24; inequality as cholesterol, 24–27 Great Recession, impact on pawnbroking, 136, 137f Greece, responses to long-term recession, 158, 163–167 Greenwald, G., 12 Grexit, 163, 166 guanxi index, 96 Gujarat Agricultural Debtors Relief Act (1972), 112 habeas corpus, 32–33 Harsanyi, J., 169, 170, 173, 176–177, 178 Hassoun, Nicole, 8–9, 202 Hayek, F., 170 High-Powered Committee on Cooperatives (India), 111 Hobbes, T., 16 Hockett, R., 153 Hoff, Karla, 3, 55, 196, 199, 200 Hollande, Francois, 28 homeownership, by pawnshop customers, 133 Hörisch, H., 171 Huang, X., 97 human capital, 89 Huntington, S. P., 16 ICC (International Criminal Court), 45–46 ICRISAT (International Crop Research Institute for the Semi Arid Tropics), 110 IMF (International Monetary Fund), 160, 161–162, 166–167 Implicit Association Tests, 68–69 income distribution, 22–25, 23f, 190 India: commercial banks in, 115f; Constitution (1950), 68, 70; corruption in, 4; crop insurance scheme, 122; debt relief acts, 105; indepen dence movement, 105; laws, unexpected
Index
consequences of, 57–58; recent sociopolitical trends, 42–43; reduction of discrimination through desegregation of elite schools by income class, 71–72, 73f; women leaders in, 68 India, rural credit in, 101–126; during colonial period, 103–108; conclusions on, 121–122; credit cooperatives as replacement for moneylenders, 108–114; introduction to, 5, 8, 101–102; liberalization and rise of microfinance, 119–121; rural banking, expansion of, 114–119, 115f, 116t, 117t, 118t individual choices, moral choices vs., 7 Industrial Revolution, 21–22, 142 inequality: analysis of, 24–27; good vs. bad, 25–26; impact on democracy, 21–25, 22f; inter-country, 154; technology and rise in, 145, 151, 152 initial social capital, 92–93 institutions: informal, corruption and, 94–95; institutional practices as categories, 57; institutionalist thesis, 205; political contexts for, 37 interest rates for loans, 113–114 internal cognitive order, 66–67, 67f International Criminal Court (ICC), 45–46 International Crop Research Institute for the Semi Arid Tropics (ICRISAT), 110 international law, instrumentalization of, 45–46 international macroeconomics: impossible trinity of, 157–158, 161; monetary policy institutions and, 159–164 International Monetary Fund (IMF), 160, 161–162, 166–167 international monetary policy regimes, law and, 157–168; introduction to, 6–7, 157–159; macroeconomic imbalances, using wage and price controls to address, 164–167; monetary policy institutions and international macroeconomics, 159–164 international-$, 19f internet serv ices, lack of legislation governing, 192 invisible hand (of the market), 1, 2, 141 Iran, Western interventions in, 45 Islam, prohibition of interest on credit, 191 Italy, Mussolini in, 16 items in exchanges, 184–185, 193 Iyer, Krishna, 113 Iyer, Lakshmi, 70 Japan, economic stagnation, 25 Jayant Kumar and Others versus Union of India and Others, 122
219
Jevons, Stanley, 142 Jobs, Steve, 26 Johnsen, Dawn, 48n3 Johnson, Dixie P., 133, 138n7 Johnson, Robert W., 133, 138n7 judiciary: in China, 94; circumvention of, 43–44; question of independence of, 38; role of, 37 Kahneman, Daniel, 68 Kanz, M., 118 Kariv, S., 170–173, 177–179 Karnataka Moneylenders Act (1961, India), 123n15 Kerala, India, moneylenders’ charges, 123n19 Kerala Moneylenders Act (1958, India), 123n15 Keynes, John Maynard, 169 Khan, M., 37 Kharas, H., 24 Khashoggi, Jamal, 44–45 Khusro Committee (Agricultural Credit Review Committee, RBI), 117–118 Kill List (Disposition Matrix), 11–12, 14 Kitayama, Shinobu, 79n4 Kochar, Anjini, 117 Konigheim, Germany, 67 Kulkarni, Parashar, 58 labor markets, wage discrimination in, 151 Lakner, C., 22–23, 23f land: as asset in rural India, 116; land auctions, manipulation of, 118; land rights under British Raj, 107; land transfers in India, 103, 104–105, 114 Land Improvement Loans Act (1883, India), 105, 106f law(s): antitrust law (See antitrust century, end of); beyond law and economics, 202–209; changing of, to reshape the world, 197–201; functions of, 3, 55, 56, 58, 195–197; l egal frameworks, exchange configurations and, 182, 187–188; market exchange, relations with, 192; market failures, use of legal measures to address, 187–192; ordering contestation, role in, 196–197; overreliance on (See India, rural credit in); power of, 2; primacy of, 27; reimagining governance through role of, 195–201; types and hierarchies of, 8. See also international monetary policy regimes, law and law, economics, and conflict (in general): antitrust century, end of, 140–156; China, fighting corruption in, 86–100; democracy,
220 Index
law, economics, and conflict (in general) (continued) evaluation of, 11–54; economics as moral science, 169–181; exchange configurations and legal framework, 182–194; governance, reimagining through role of law, 195–201; India, rural credit in, 101–126; international monetary policy regimes, law and, 157–168; introduction to, 1–10; law, influence on cultural categories, 55–85; legitimate distribution without legislation, question of, 202–209; pawnshops, 127–139 law, influence on cultural categories, 55–85; analytical argument on, 56–58; conclusions on, 78–79, 199–200; introduction to, 3–4, 55–56; mental models, mechanics of, 58–66; policy argument on, 58; transformed cultural categories, examples of, 66–78 “Lawfulness of a Lethal Operation Directed against a US Citizen . . .” (US Office of Legal Counsel), 48n3 Lee Myung-bak, 29 legitimate distribution without legislation, question of, 8–9, 202–209 Lessig, Lawrence, 66 Li, M., 96 Listokin, Yair, 7, 157, 202 literacy, historical rates of, 17–18 lobbying, 37–38 Locke, John, 31 Long, C. X., 97, 99n8 Long, Cheryl, 4, 86, 199 López-Calva, Luis-Felipe, 8, 195 Lorenz, K., 36 lotteries, 173–174 low-income households. See pawnshops Luckmann, Thomas, 79n4 Lula da Silva, Luiz Inacio, 29, 38 Macron, Emmanuel, 14, 27, 49n9 Madison, James, 31 Maharashtra Debt Relief Act (1975, India), 113 Mali, civics course, 79n7 mandated deflation, 166–167 Maniquet, F., 177 Mann, Harold, 101, 122 markets: corruption and access to, 86–87; market exchange, relations with law, 192; market failures, 8, 34–39, 187–192; market power, uneven, 190; market regulation, technological change and (See antitrust century, end of); neoclassical models of, 183; vertically serrated, 6, 145–150, 152
Markus, Hazel Rose, 79n4 math competitions, 76–78 maximin rule, 170–171 McCloskey, Deirdre, 78 McNamara, Robert, 46 Menon, Meena, 122 mental models, mechanics of, 58–66; cultural mental models, persistence of, 67; gender, mental models of, 61–64; race narratives as weapon of southern elite after Civil War, 64–66; roles of mental models, 76; sources of mental models, 59 Mertens, J.-F., 177 microfinance and Microfinance Institutions (MFIs) in India, 101, 102, 114, 119–122 middle class, income distribution changes (1988–2008), 23, 23f Milanovic, B., 20, 22–23, 23f Mill, Stuart, 31 Modi, Narendra, 42 monetary policy institutions and international macroeconomics, 159–164 money, velocity of, 167n4 moneylenders (in India), 101–103, 108–114, 110t, 111t, 119–122, 123n15 Monga, Célestin, 2, 11, 196, 197, 198 Mongols, violence of, 16 monopolies, 151, 152–154, 190, 197, 202 monopsonies, market failures and, 190 morality: ethics vs., 180n2; moral choices vs. individual choices, 7. See also economics as moral science; ethics Moreira, Diana, 77–78 Morocco, use of currency pegs, 159 Muggah, R., 29 Mussolini, Benito, 16 mutual credit associations, 106 Mysore Agricultural Debtors Relief Act (1966, India), 112 Nash equilibriums, 146–147 National Crime Records Bureau (India), 121 national defense systems, 189 National Economic Research Institute (NERI, China), 96 National Institute for Lobbying and Ethics (US), 38 National Institute on Drug Abuse (US), 38 national math competitions, 76–78 National Pawnbroking Association (US), 133 National Security Agency (US), 12 negative externalities (costs) and external benefits (positive externality), 189–190
Index
NERI (National Economic Research Institute, China), 96 New Institutional Economics (NIE), 183 new technology. See antitrust century, end of Nicaragua, conditional cash transfer program, 74 NIE (New Institutional Economics), 183 Nisbett, Richard, 79n4 nonexcludability, as property of public goods, 188–189 nongovernmental organizations, legitimacy of, 204 nonrivalry, as property of public goods, 188–189 North, Douglass C. (D. C.), 59, 95, 183 Norway, parental law for fathers, 58 Nussbaum, M., 177 Obama, Barack, 11–12, 46, 48n3 oligopoly theory, 146 omniscient political agents and representative citizens, myth of, 39–43 one-two punches, 58 opportunistic behavior, 184 optimal currency areas, theory of, 167n2 oral land leases, 116, 123n26 Orban, Victor, 27 original political sin, 29–32 original position (of society), 169–170 Orwell, George, 11 Pande, Rohini, 116 Pandey, Priyanka, 70 Park Geun-hye, 29 participative democracy, 33 Paul, Ron, 39 pawnshops and pawnbroking, 127–139; alternative credit types and, 135–136; conclusions on, 136–138; data on, 129; introduction to, 5–6, 127–129; pawn customers and borrowing behavior, 131t, 132t, 133–135, 134f, 135f, 137t; pawnbroking industry, 129–132, 130t, 131–132t payday loans, 127, 136, 138n6 perfect competition vs. perfectly price- discriminating monopoly, 144 Perry, Rick, 39–40, 41 personal income distribution, 190 personal relationships, corruption in China and, 95 philosophy, on technocratic decisions, 203–204 Pinker, S., 18, 29 Plato, 27, 30
221
Plessy v. Ferguson, 55 pogroms, 67 Polanyi, Karl, 183–184 policy, impact on mental models, 60–61 politics: political externalities, 35; political markets, 34–41; political reservations for women, 67–71; political well-being, problem of measurement of, 19–21; politicians’ campaign promises, 35 the poor, self-images of, 73–74 populism, 14 Portugal, democracy in, 16 positive externality (external benefits) and costs (negative externalities), 189–190 poverty, impacts of, 72–74 power asymmetries, 200 Pradhan Mantri Fasal Bima Yojana (crop insurance scheme, India), 122 pradhans (village heads), 68–69 preferences: impact of experiences on, 60; influence of concepts on, 69 president (US), privileges of, 12 prices, 7, 149–151, 157, 158–159, 164 primary social goods, 170 prisoner’s dilemma game, 60 privacy, death of, 14 private firms, corruption by, 90 production costs, in neoclassical market models, 183 productivity, corruption and, 90–91 profit sharing at national levels, 153 promotoras, 74–75, 80n14 prosociality, 60 prototypes and exemplars, 67–68 public goods, 154, 188–189 public sector, paternalism of, 191 Punjab, India: Agricultural Debtors (Relief) Act (1975), 112–113; under British Raj, 105; Land Alienation Act (1901), 105; land mortgages and sales, 105, 106f quality of life, Zakaria on, 18 Qureishi, Anwar, 114 race and racism: impact on drug convictions, 38–39; race narratives as weapon of southern elite after Civil War, 64–66; racial segregation, judicial history of, 55–56 Raiffeisen Society, 107 Raj, British, 101, 103, 104, 107 Rajasthan Moneylenders Act (1963, India), 123n15 Rao, Gautam, 71–72, 79n9
222 Index
rational actors vs. human actors, 78 rational choice models, 41 Rawls, J., 169–170, 175, 177 Raz, J., 8 RBI (Reserve Bank of India), 108–109, 112–114, 117–118, 119 Reddy, Y. Venugopal, 102 Regional Rural Banks (India), 115 regulation as breeding corruption, 92 regulatory capital, 89, 91–92, 93 representative citizens and omniscient political agents, myth of, 39–43 Reserve Bank of India (RBI), 108–109, 112–114, 117–118, 119 resource allocation, 88, 203–206, 207n2 Restoration (France), basis for suffrage in, 31 revealed preference theory, 170 Ricoeur, P., 180n2 rights revolution, 18 riot democracies (démocracies de l’émeute), 14 risk: risk attitudes, deduction from ethics, 174–177; risk environments, 172–173; risk preferences, 170, 171, 176, 178–179 Roberts, John, 56 Robinson-Patman Act (1936, US), 142, 150, 152 Rodrik, Dani (D.), 34, 160 Rothman, J., 20 Rousseff, Dilma, 29, 38 rules: rule of law, 196, 197; rules game, 200; types of, 195 rural credit markets. See India, rural credit in Rwanda, genocide in, 46 Samolyk, Katherine, 138n7, 138n9 Sarkozy, Nicolas, 28, 38 sati (widow immolations), 57 Saudi Arabia, use of currency pegs, 159 Scheduled Castes (India), 70, 200 schemas. See m ental models, mechanics of schematizing function of law, 55, 58, 66–67, 67f, 78–79 search costs, reductions in, 145 secondary income distribution, 190 secret law, 48n3 Seidel, B., 24 self-assertion, 36 self-efficacy, 73–74 self-help groups (SHGs), 102, 119, 120–121 selfishness property, 173–174, 178 self-regarding, 177–178, 179 Sen, Abhijit (A. K., A.), 43, 121, 177 serrated industries, 6, 145–150, 152
Shah, Mihir, 119 shame, 73 shareholding, diversification of, 152–153 Sharma, M. S., 42 Sherman Antitrust Act (1890, US), 2, 6, 142, 145, 151 SHGs (self-help groups), 102, 119, 120–121 short-term transfer programs, 72–76, 76t Skiba, Paige Marta, 5, 127, 138n5 slavery (bonded labor), 64–66, 144 Smith, Adam, 2, 7, 141, 142, 145 society: power distribution in, 37; social capital and social connections, 88–89, 91–92; social choice environments, 172–173; social connections, increased corruption from reliance on, 91–92; social norms, 55, 66, 199; social preferences, 170, 171, 174–176, 178–179; social progress, 18. See also law, influence on cultural categories SOEs (state-owned enterprises), 90 Sokoloff, K. L., 32 Southern elites (US), 64–66 Soviet Union, fall of, 25 standard demand curve, 142–143, 143f standard monopoly equilibriums, 149, 149f state-owned enterprises (SOEs), 90 statistical discrimination, 57 Steiner, H., 153 stereotypes, 57, 69 Stiglitz, J., 152 strategic amnesia, 45 suffrage censitaire, 31 suicides, by farmers in India, 5 Sunstein, Cass R., 63, 66 Supreme Court (India): Fatehchand Himmatlal and Others versus the State of Maharashtra, 113; Jayant Kumar and Others versus Union of India and Others, 122 Swamy, Anand, 5, 101, 196–197 Sweden, pawnbroking industry in, 6, 129–132, 130t, 131–132t, 134f, 135f, 137f, 137t, 138 Syria, war in, 36 targeted killings, 11–12 taxes and taxation, 30–31, 50n16, 103, 190 technocrats, resource allocation decisions by, 202–206, 207n2 technology: confusions caused by, 198–199; impact of, 13–14; pricing using, 150–151; of production, corruption and, 94; technological change, regulatory challenge of, 141–142. See also antitrust century, end of tenancy legislation (India), 116
Index
Terror Tuesday, 12, 196 terrorism, 11–12 tertiary income distribution, 190 Thorbecke, Erik, 8, 182, 193n5 Thorner, Daniel, 109 Thunberg, Greta, 198 Tocqueville, Alexis de, 31, 59 Tomassi, M., 195 totalitarian democracies, 14 tradition, Chesterton on, 28 Transaction Cost Economics, 184 transaction costs and modes, 182, 183–184 transformed cultural categories, examples of, 66–78; children, impact of investments in, 72–76, 76t; elite school desegregation by income class, impact of, 71–72; gender representations, transformations of, 67–71; introduction to, 66–67; national math competition, impact of, 76–78 transition economies, challenges of fighting corruption in, 96–98 Transparency International, Corruption Perceptions Index 2017, 86 Treaty of Lisbon, 164 tribal farmers in India, 104–105 Trump, Donald: on China’s National Intelligence Law, 48n6; election of, 27; Energy secretary under, 40; on judicial independence, 38; on Khashoggi murder, 44–45; presidency of, transition to Biden, 43; self-identification of, 14 Tversky, Amos, 68 twin dispersal approach to monopolies, 152–154, 197, 202 undemocratic practices, 43–48 undesirable goods (bads), 191 unfairness vs. inequality, 25–26 United Kingdom: Brexit vote, 27; electorate education in, 42 United States: as carceral state, 38; electorate education in, 42; free banking era, 167n3; pawnbroking industry in, 6, 129–136, 130t, 131–132t, 137f, 138; public discontent in, 26; slavery in, 64; voter suppression charges in, 31; White House, Tuesday morning meetings, 3, 11–12 universal suffrage, democratic trilemma and, 33–34 upper middle class, income distribution changes, 23, 23f Usurious Loans Act (1918, India), 122 Uttar Pradesh, India, rural banking in, 117
223
Uzramma (director of Malkha Marketing Trust), 122 Vaidyanathan Committee (India), 111 values vs. facts, 169 veil of ignorance. See economics as moral science vertically fragmented equilibriums, 148, 149f vertically serrated industries (serrated industries), 6, 145–150, 152 Vietnam War, 46 village heads (pradhans), 68–69 violence, historical, 15–16 virtuous circles, 201 wage and price controls, 158, 164–167 Walras, Leon, 142 Walsh, James, 3, 55, 196, 199, 200 Warren, Earl, 55, 56 wars, death and harms from, 36 WDR 2017 (World Development Report 2017 on Governance and the Law), 8, 195–201 wealthy students, effects of interactions with poor students, 71–72, 73f Webb-Pomerene Act (1918, US), 144–145 Weber, Max, 169 Weibull, Jorgen (J.), 141, 152 Weitzman, M. L., 153 welfare economics, 146, 169 Wertheim, Germany, 67 White House, Tuesday morning meetings, 3, 11–12 widow immolations (sati), 57 Williamson, O. E., 95, 184 Wilson, Woodrow, 207n9 women: gender representations of, transformation of, 67–71; in industry and academia, 61–63; as leaders in India, 68 workers, exploitation of, 155n3 World Development Report 2017 on Governance and the Law (World Bank), 8, 195–201 World Trade Organization, 191–192 Xi Jinping, 4, 86, 98 Yang, J., 99n8 Yellow Vest movement, 14, 27, 49n9 Young, Allyn, 145 Yugoslavia, Milanovic’s experiences of, 20 Zakaria, F., 18 Zame, W., 170–171, 172, 173, 180n6 Zhang, X., 99n8